While small-cap stocks, such as Rovsing A/S (CPH:ROV) with its market cap of ø44m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since ROV is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into ROV here.
Does ROV produce enough cash relative to debt?
ROV has built up its total debt levels in the last twelve months, from ø10m to ø14m . With this increase in debt, ROV’s cash and short-term investments stands at ø143k for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of ROV’s operating efficiency ratios such as ROA here.
Can ROV meet its short-term obligations with the cash in hand?
With current liabilities at ø18m, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.71x.
Can ROV service its debt comfortably?
ROV is a relatively highly levered company with a debt-to-equity of 75%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since ROV 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.
ROV’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for ROV’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Rovsing to get a better picture of the stock by looking at:
- Historical Performance: What has ROV’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.