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Investors are always looking for growth in small-cap stocks like Valmet Oyj (HEL:VALMT), with a market cap of €3.6b. 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. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. Nevertheless, these checks don’t give you a full picture, so I recommend you dig deeper yourself into VALMT here.
VALMT’s Debt (And Cash Flows)
VALMT has built up its total debt levels in the last twelve months, from €202m to €359m – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at €511m to keep the business going. Additionally, VALMT has produced cash from operations of €295m over the same time period, leading to an operating cash to total debt ratio of 82%, meaning that VALMT’s debt is appropriately covered by operating cash.
Does VALMT’s liquid assets cover its short-term commitments?
With current liabilities at €1.8b, the company may not have an easy time meeting these commitments with a current assets level of €1.8b, leading to a current ratio of 1x. The current ratio is the number you get when you divide current assets by current liabilities.
Does VALMT face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 41%, VALMT can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if VALMT’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 VALMT, the ratio of 50.4x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving VALMT ample headroom to grow its debt facilities.
VALMT’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. Though its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure VALMT has company-specific issues impacting its capital structure decisions. I recommend you continue to research Valmet Oyj to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for VALMT’s future growth? Take a look at our free research report of analyst consensus for VALMT’s outlook.
- Valuation: What is VALMT 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 VALMT 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.
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 firstname.lastname@example.org. 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.