While small-cap stocks, such as Allgäuer Brauhaus AG (MUN:ALB) with its market cap of €77m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into ALB here.
How much cash does ALB generate through its operations?
Over the past year, ALB has reduced its debt from €8m to €6m , which is mainly comprised of near term debt. With this reduction in debt, ALB currently has €231k remaining in cash and short-term investments for investing into the business. Moreover, ALB has produced cash from operations of €3m over the same time period, resulting in an operating cash to total debt ratio of 50%, indicating that ALB’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 ALB’s case, it is able to generate 0.5x cash from its debt capital.
Can ALB meet its short-term obligations with the cash in hand?
At the current liabilities level of €8m liabilities, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.83x.
Does ALB face the risk of succumbing to its debt-load?
With total debt exceeding equities, ALB is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In ALB’s case, the ratio of 3.97x 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.
ALB’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. But, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure ALB has company-specific issues impacting its capital structure decisions. I recommend you continue to research Allgäuer Brauhaus to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ALB’s future growth? Take a look at our free research report of analyst consensus for ALB’s outlook.
- Valuation: What is ALB 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 ALB 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 firstname.lastname@example.org.