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Is Suominen Oyj's (HEL:SUY1V) Balance Sheet A Threat To Its Future?

Simply Wall St

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Suominen Oyj (HEL:SUY1V) is a small-cap stock with a market capitalization of €142m. 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? Since SUY1V is loss-making right now, it’s crucial to evaluate the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is just a partial view of the stock, and I suggest you dig deeper yourself into SUY1V here.

Does SUY1V Produce Much Cash Relative To Its Debt?

SUY1V has built up its total debt levels in the last twelve months, from €106m to €116m , which includes long-term debt. With this rise in debt, SUY1V currently has €22m remaining in cash and short-term investments , ready to be used for running the business. On top of this, SUY1V has produced €25m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 21%, indicating that SUY1V’s current level of operating cash is high enough to cover debt.

Does SUY1V’s liquid assets cover its short-term commitments?

Looking at SUY1V’s €93m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.55x. The current ratio is calculated by dividing current assets by current liabilities. For Household Products companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

HLSE:SUY1V Historical Debt, June 18th 2019

Can SUY1V service its debt comfortably?

SUY1V is a relatively highly levered company with a debt-to-equity of 76%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. However, since SUY1V is currently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

SUY1V’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 SUY1V's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure SUY1V has company-specific issues impacting its capital structure decisions. You should continue to research Suominen Oyj to get a better picture of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for SUY1V’s future growth? Take a look at our free research report of analyst consensus for SUY1V’s outlook.
  2. Valuation: What is SUY1V 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 SUY1V 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.