Sioen Industries NV (EBR:SIOE) is a small-cap stock with a market capitalization of €498m. 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. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. However, these checks don’t give you a full picture, so I recommend you dig deeper yourself into SIOE here.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Does SIOE Produce Much Cash Relative To Its Debt?
SIOE’s debt level has been constant at around €144m over the previous year which accounts for long term debt. At this stable level of debt, SIOE’s cash and short-term investments stands at €27m to keep the business going. On top of this, SIOE has produced €45m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 32%, signalling that SIOE’s current level of operating cash is high enough to cover debt.
Does SIOE’s liquid assets cover its short-term commitments?
Looking at SIOE’s €99m in current liabilities, the company has been able to meet these obligations given the level of current assets of €232m, with a current ratio of 2.35x. The current ratio is calculated by dividing current assets by current liabilities. For Luxury 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.
Does SIOE face the risk of succumbing to its debt-load?
With debt reaching 64% of equity, SIOE may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether SIOE is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In SIOE’s, case, the ratio of 16.95x 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.
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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how SIOE has been performing in the past. You should continue to research Sioen Industries to get a better picture 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.
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 email@example.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.