While small-cap stocks, such as Siili Solutions Oyj (HEL:SIILI) with its market cap of €61m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, 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. However, this is not a comprehensive overview, so I suggest you dig deeper yourself into SIILI here.
Does SIILI Produce Much Cash Relative To Its Debt?
SIILI’s debt levels surged from €778k to €14m over the last 12 months , which includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at €10m , ready to be used for running the business. Additionally, SIILI has produced cash from operations of €2.1m during the same period of time, resulting in an operating cash to total debt ratio of 16%, meaning that SIILI’s operating cash is less than its debt.
Does SIILI’s liquid assets cover its short-term commitments?
Looking at SIILI’s €16m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of €23m, with a current ratio of 1.44x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for IT companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can SIILI service its debt comfortably?
SIILI is a relatively highly levered company with a debt-to-equity of 69%. 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 SIILI’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 SIILI, the ratio of 16.12x 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.
SIILI’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. I admit this is a fairly basic analysis for SIILI’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Siili Solutions Oyj to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SIILI’s future growth? Take a look at our free research report of analyst consensus for SIILI’s outlook.
- Valuation: What is SIILI 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 SIILI 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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