While small-cap stocks, such as Sioen Industries NV (EBR:SIOE) with its market cap of €473m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, 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, this commentary is still very high-level, so I suggest you dig deeper yourself into SIOE here.
How does SIOE’s operating cash flow stack up against its debt?
SIOE’s debt levels have fallen from €166m to €149m over the last 12 months – this includes both the current and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at €14m for investing into the business. On top of this, SIOE has generated cash from operations of €49m during the same period of time, leading to an operating cash to total debt ratio of 33%, meaning that SIOE’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SIOE’s case, it is able to generate 0.33x cash from its debt capital.
Does SIOE’s liquid assets cover its short-term commitments?
With current liabilities at €171m, the company has been able to meet these obligations given the level of current assets of €245m, with a current ratio of 1.43x. Generally, for Luxury companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is SIOE’s debt level acceptable?
With debt reaching 72% of equity, SIOE may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses.
Next Steps:
Although SIOE’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around SIOE’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for SIOE’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Sioen Industries to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SIOE’s future growth? Take a look at our free research report of analyst consensus for SIOE’s outlook.
- Valuation: What is SIOE 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 SIOE is currently mispriced by the market.
- 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.