While small-cap stocks, such as Airtificial Intelligence Structures, S.A. (BME:AI) with its market cap of €148m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis 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. Nevertheless, potential investors would need to take a closer look, and I recommend you dig deeper yourself into AI here.
AI’s Debt (And Cash Flows)
AI’s debt levels surged from €12m to €75m over the last 12 months , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at €18m to keep the business going. We note it produced negative cash flow over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can take a look at some of AI’s operating efficiency ratios such as ROA here.
Can AI meet its short-term obligations with the cash in hand?
At the current liabilities level of €72m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.27x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Construction companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does AI face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 61%, AI can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if AI’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For AI, the ratio of 1.76x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
AI’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how AI has been performing in the past. You should continue to research Airtificial Intelligence Structures to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AI’s future growth? Take a look at our free research report of analyst consensus for AI’s outlook.
- Historical Performance: What has AI’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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.