While small-cap stocks, such as Ambu A/S (CPH:AMBU B) with its market cap of ø30b, 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 essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company’s balance sheet strength. However, this is not a comprehensive overview, so I recommend you dig deeper yourself into AMBU B here.
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Does AMBU B Produce Much Cash Relative To Its Debt?
Over the past year, AMBU B has maintained its debt levels at around ø1.3b which accounts for long term debt. At this current level of debt, AMBU B currently has ø46m remaining in cash and short-term investments , ready to be used for running the business. Additionally, AMBU B has generated cash from operations of ø553m over the same time period, resulting in an operating cash to total debt ratio of 42%, signalling that AMBU B’s current level of operating cash is high enough to cover debt.
Can AMBU B pay its short-term liabilities?
With current liabilities at ø392m, the company has been able to meet these obligations given the level of current assets of ø1.1b, with a current ratio of 2.76x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Medical Equipment companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can AMBU B service its debt comfortably?
AMBU B is a relatively highly levered company with a debt-to-equity of 64%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether AMBU B 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 AMBU B’s, case, the ratio of 23.96x suggests that interest is comfortably 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.
AMBU B’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 AMBU B’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 AMBU B has company-specific issues impacting its capital structure decisions. I recommend you continue to research Ambu to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AMBU B’s future growth? Take a look at our free research report of analyst consensus for AMBU B’s outlook.
- Valuation: What is AMBU B 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 AMBU B 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.
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If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.