LEONI AG (FRA:LEO) is a small-cap stock with a market capitalization of €1.37b. 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? Assessing first and foremost the financial health is vital, 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. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into LEO here.
How does LEO’s operating cash flow stack up against its debt?
Over the past year, LEO has reduced its debt from €649.73m to €610.87m – this includes both the current and long-term debt. With this debt payback, the current cash and short-term investment levels stands at €132.02m for investing into the business. Moreover, LEO has produced €216.52m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 35.44%, signalling that LEO’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 LEO’s case, it is able to generate 0.35x cash from its debt capital.
Does LEO’s liquid assets cover its short-term commitments?
At the current liabilities level of €1.59b liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.1x. Generally, for Auto Components companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does LEO face the risk of succumbing to its debt-load?With debt reaching 56.38% of equity, LEO 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. We can check to see whether LEO 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 LEO’s, case, the ratio of 9.66x suggests that interest is appropriately 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.
LEO’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. Since there is also no concerns around LEO’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure LEO has company-specific issues impacting its capital structure decisions. I suggest you continue to research LEONI to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for LEO’s future growth? Take a look at our free research report of analyst consensus for LEO’s outlook.
- Valuation: What is LEO 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 LEO 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 email@example.com.