Eifelhöhen-Klinik AG (FRA:EIF) is a small-cap stock with a market capitalization of €10m. 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? Companies operating in the Healthcare industry, in particular ones that run negative earnings, tend to be high risk. So, understanding the company’s financial health becomes essential. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into EIF here.
Does EIF produce enough cash relative to debt?
EIF has built up its total debt levels in the last twelve months, from €21m to €26m , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at €14m , ready to deploy into the business. On top of this, EIF has generated cash from operations of €1.9m in the last twelve months, leading to an operating cash to total debt ratio of 7.2%, indicating that EIF’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable companies since metrics such as return on asset (ROA) requires positive earnings. In EIF’s case, it is able to generate 0.072x cash from its debt capital.
Can EIF pay its short-term liabilities?
At the current liabilities level of €12m, the company has been able to meet these commitments with a current assets level of €21m, leading to a 1.73x current account ratio. For Healthcare companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Is EIF’s debt level acceptable?
With total debt exceeding equities, EIF 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. However, since EIF is currently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although EIF’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 EIF’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 EIF has company-specific issues impacting its capital structure decisions. You should continue to research Eifelhöhen-Klinik to get a more holistic view of the small-cap by looking at:
- Historical Performance: What has EIF’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.
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