Investors are always looking for growth in small-cap stocks like Schaffner Holding AG (VTX:SAHN), with a market cap of CHF203.81m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Electronic industry, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I suggest you dig deeper yourself into SAHN here.
How does SAHN’s operating cash flow stack up against its debt?
SAHN has built up its total debt levels in the last twelve months, from CHF36.80m to CHF44.12m , which is made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at CHF27.56m for investing into the business. On top of this, SAHN has generated cash from operations of CHF13.22m during the same period of time, resulting in an operating cash to total debt ratio of 29.97%, meaning that SAHN’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SAHN’s case, it is able to generate 0.3x cash from its debt capital.
Can SAHN meet its short-term obligations with the cash in hand?
With current liabilities at CHF50.89m, it seems that the business has been able to meet these obligations given the level of current assets of CHF121.50m, with a current ratio of 2.39x. For Electronic 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.
Does SAHN face the risk of succumbing to its debt-load?With a debt-to-equity ratio of 79.07%, SAHN can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if SAHN’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 SAHN, the ratio of 12.41x 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.
SAHN’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. 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 SAHN has been performing in the past. I suggest you continue to research Schaffner Holding to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SAHN’s future growth? Take a look at our free research report of analyst consensus for SAHN’s outlook.
- Historical Performance: What has SAHN’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 email@example.com.