Faes Farma SA (BME:FAE) is a small-cap stock with a market capitalization of €1.04b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Pharmaceuticals companies, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into FAE here.
How does FAE’s operating cash flow stack up against its debt?
Over the past year, FAE has reduced its debt from €55.69m to €43.60m , which comprises of short- and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at €57.55m for investing into the business. Additionally, FAE has produced €58.39m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 133.93%, meaning that FAE’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 FAE’s case, it is able to generate 1.34x cash from its debt capital.
Can FAE meet its short-term obligations with the cash in hand?
At the current liabilities level of €109.25m liabilities, it seems that the business has been able to meet these commitments with a current assets level of €205.38m, leading to a 1.88x current account ratio. For Pharmaceuticals companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is FAE’s debt level acceptable?FAE’s level of debt is appropriate relative to its total equity, at 12.68%. FAE is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether FAE 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 FAE’s, case, the ratio of 198x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving FAE ample headroom to grow its debt facilities.
FAE’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure FAE has company-specific issues impacting its capital structure decisions. I recommend you continue to research Faes Farma to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for FAE’s future growth? Take a look at our free research report of analyst consensus for FAE’s outlook.
- Valuation: What is FAE 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 FAE 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.