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Kojamo Oyj (HEL:KOJAMO) is a small-cap stock with a market capitalization of €2.6b. 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? 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. However, this is not a comprehensive overview, so I recommend you dig deeper yourself into KOJAMO here.
KOJAMO’s Debt (And Cash Flows)
KOJAMO has built up its total debt levels in the last twelve months, from €2.3b to €2.5b – this includes long-term debt. With this rise in debt, KOJAMO’s cash and short-term investments stands at €150m to keep the business going. Moreover, KOJAMO has produced cash from operations of €112m during the same period of time, leading to an operating cash to total debt ratio of 4.4%, signalling that KOJAMO’s debt is not covered by operating cash.
Can KOJAMO meet its short-term obligations with the cash in hand?
Looking at KOJAMO’s €177m in current liabilities, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.95x. The current ratio is the number you get when you divide current assets by current liabilities.
Can KOJAMO service its debt comfortably?
With total debt exceeding equity, KOJAMO is considered a highly levered company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 KOJAMO’s case, the ratio of 4.42x 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.
Although KOJAMO’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for KOJAMO’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Kojamo Oyj to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for KOJAMO’s future growth? Take a look at our free research report of analyst consensus for KOJAMO’s outlook.
- Valuation: What is KOJAMO 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 KOJAMO 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.