You Might Like LleidaNetworks Serveis Telemàtics, S.A. (BME:LLN) But Do You Like Its Debt?

Investors are always looking for growth in small-cap stocks like LleidaNetworks Serveis Telemàtics, S.A. (BME:LLN), with a market cap of €15m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is not a comprehensive overview, so I recommend you dig deeper yourself into LLN here.

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Does LLN Produce Much Cash Relative To Its Debt?

LLN's debt levels have fallen from €3.8m to €3.4m over the last 12 months , which includes long-term debt. With this debt payback, LLN currently has €1.8m remaining in cash and short-term investments , ready to be used for running the business. Additionally, LLN has produced €1.7m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 48%, signalling that LLN’s operating cash is sufficient to cover its debt.

Can LLN pay its short-term liabilities?

With current liabilities at €4.4m, it seems that the business has been able to meet these commitments with a current assets level of €4.5m, leading to a 1.01x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Telecom 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.

Is LLN’s debt level acceptable?

With total debt exceeding equity, LLN is considered a highly levered 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 LLN’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 LLN, the ratio of 5.74x suggests that interest is appropriately 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.

Next Steps:

Although LLN’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around LLN'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 LLN has company-specific issues impacting its capital structure decisions. I recommend you continue to research LleidaNetworks Serveis Telemàtics to get a better picture of the small-cap by looking at:

1. Valuation: What is LLN 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 LLN is currently mispriced by the market.
2. Historical Performance: What has LLN'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.
3. 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.