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While small-cap stocks, such as Senioresidenz AG (BRN:SENIO) with its market cap of CHF70m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since SENIO is loss-making right now, it’s crucial to evaluate the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I recommend you dig deeper yourself into SENIO here.
How much cash does SENIO generate through its operations?
Over the past year, SENIO has maintained its debt levels at around CHF9.0b – this includes long-term debt. At this current level of debt, SENIO’s cash and short-term investments stands at CHF1.2b , ready to deploy into the business. Moreover, SENIO has generated cash from operations of CHF383m during the same period of time, leading to an operating cash to total debt ratio of 4.3%, signalling that SENIO’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires positive earnings. In SENIO’s case, it is able to generate 0.043x cash from its debt capital.
Does SENIO’s liquid assets cover its short-term commitments?
At the current liabilities level of CHF310m, it seems that the business has been able to meet these obligations given the level of current assets of CHF1.2b, with a current ratio of 3.95x. However, a ratio above 3x may be considered excessive by some investors.
Can SENIO service its debt comfortably?
With debt reaching 68% of equity, SENIO 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. Though, since SENIO is presently loss-making, 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.
Although SENIO’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 SENIO’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for SENIO’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Senioresidenz to get a better picture of the small-cap by looking at:
- Historical Performance: What has SENIO’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.
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 firstname.lastname@example.org.