Investors are always looking for growth in small-cap stocks like Allgäuer Brauhaus AG (MUN:ALB), with a market cap of €69m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into ALB here.
Does ALB Produce Much Cash Relative To Its Debt?
ALB has shrunk its total debt levels in the last twelve months, from €7.6m to €5.9m made up of predominantly near term debt. With this debt repayment, the current cash and short-term investment levels stands at €231k , ready to be used for running the business. Moreover, ALB has generated €2.9m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 50%, indicating that ALB’s current level of operating cash is high enough to cover debt.
Does ALB’s liquid assets cover its short-term commitments?
Looking at ALB’s €8.4m in current liabilities, it seems that the business may not have an easy time meeting these commitments with a current assets level of €7.0m, leading to a current ratio of 0.83x. The current ratio is the number you get when you divide current assets by current liabilities.
Can ALB service its debt comfortably?
With total debt exceeding equity, ALB is considered a highly levered company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 before interest and tax (EBIT) 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 debtors may be willing to loan the company more money, giving ALB ample headroom to grow its debt facilities.
Although ALB’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how ALB has been performing in the past. I suggest you continue to research Allgäuer Brauhaus to get a better picture of the stock by looking at:
- 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.
- Historical Performance: What has ALB’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.
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