Investors are always looking for growth in small-cap stocks like Atresmedia Corporación de Medios de Comunicación, S.A. (BME:A3M), with a market cap of €954m. However, an important fact which most ignore is: how financially healthy is the business? 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. We’ll look at some basic checks that can form a snapshot the company’s financial strength. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into A3M here.
A3M’s Debt (And Cash Flows)
A3M’s debt levels surged from €265m to €325m over the last 12 months , which includes long-term debt. With this rise in debt, A3M’s cash and short-term investments stands at €110m , ready to be used for running the business. On top of this, A3M has generated €171m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 53%, indicating that A3M’s current level of operating cash is high enough to cover debt.
Can A3M pay its short-term liabilities?
At the current liabilities level of €593m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.26x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Media companies, this is a suitable ratio 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 77% of equity, A3M may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In A3M’s case, the ratio of 27.17x 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.
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. I recommend you 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.
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