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Is Sogeclair SA's (EPA:SOG) Balance Sheet Strong Enough To Weather A Storm?

Simply Wall St

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Sogeclair SA (EPA:SOG) is a small-cap stock with a market capitalization of €78m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Understanding the company's financial health becomes essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is not a comprehensive overview, so I suggest you dig deeper yourself into SOG here.

SOG’s Debt (And Cash Flows)

Over the past year, SOG has ramped up its debt from €29m to €42m , which includes long-term debt. With this growth in debt, SOG's cash and short-term investments stands at €19m , ready to be used for running the business. We note it produced negative cash flow over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can take a look at some of SOG’s operating efficiency ratios such as ROA here.

Does SOG’s liquid assets cover its short-term commitments?

Looking at SOG’s €71m in current liabilities, the company has been able to meet these obligations given the level of current assets of €118m, with a current ratio of 1.66x. The current ratio is calculated by dividing current assets by current liabilities. For Aerospace & Defense companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.

ENXTPA:SOG Historical Debt, July 18th 2019

Does SOG face the risk of succumbing to its debt-load?

With debt reaching 60% of equity, SOG may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if SOG’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For SOG, the ratio of 23.31x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

SOG’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around SOG's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for SOG's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Sogeclair to get a better picture of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for SOG’s future growth? Take a look at our free research report of analyst consensus for SOG’s outlook.
  2. Valuation: What is SOG worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether SOG is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.