While small-cap stocks, such as Atresmedia Corporación de Medios de Comunicación, S.A. (BME:A3M) with its market cap of €1.1b, 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 crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I recommend you dig deeper yourself into A3M here.
How much cash does A3M generate through its operations?
A3M has built up its total debt levels in the last twelve months, from €194m to €305m , which accounts for long term debt. With this rise in debt, the current cash and short-term investment levels stands at €106m for investing into the business. Moreover, A3M has generated €216m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 71%, signalling that A3M’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In A3M’s case, it is able to generate 0.71x cash from its debt capital.
Can A3M meet its short-term obligations with the cash in hand?
At the current liabilities level of €531m, the company has been able to meet these obligations given the level of current assets of €698m, with a current ratio of 1.31x. For Media 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.
Does A3M face the risk of succumbing to its debt-load?
With debt reaching 65% of equity, A3M may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if A3M’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 A3M, the ratio of 24.28x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving A3M ample headroom to grow its debt facilities.
A3M’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. This is only a rough assessment of financial health, and I’m sure A3M has company-specific issues impacting its capital structure decisions. You should continue to research Atresmedia Corporación de Medios de Comunicación to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for A3M’s future growth? Take a look at our free research report of analyst consensus for A3M’s outlook.
- Valuation: What is A3M 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 A3M 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.
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 firstname.lastname@example.org.