Société Internationale de Plantations d’Hévéas Société Anonyme (EPA:SIPH) is a small-cap stock with a market capitalization of €431.69m. 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? Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into SIPH here.
Does SIPH produce enough cash relative to debt?
SIPH’s debt levels have fallen from €115.89m to €89.75m over the last 12 months – this includes both the current and long-term debt. With this reduction in debt, SIPH’s cash and short-term investments stands at €39.00m for investing into the business. On top of this, SIPH has produced €78.96m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 87.97%, signalling that SIPH’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SIPH’s case, it is able to generate 0.88x cash from its debt capital.
Can SIPH pay its short-term liabilities?
With current liabilities at €82.24m, the company has been able to meet these commitments with a current assets level of €143.23m, leading to a 1.74x current account ratio. Usually, for Chemicals companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does SIPH face the risk of succumbing to its debt-load?SIPH’s level of debt is appropriate relative to its total equity, at 39.18%. This range is considered safe as SIPH is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if SIPH’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 SIPH, the ratio of 14.07x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving SIPH ample headroom to grow its debt facilities.
SIPH has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for SIPH’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Société Internationale de Plantations d’Hévéas Société Anonyme to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SIPH’s future growth? Take a look at our free research report of analyst consensus for SIPH’s outlook.
- Historical Performance: What has SIPH’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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.