Elis SA (EPA:ELIS): Time For A Financial Health Check

Investors are always looking for growth in small-cap stocks like Elis SA (EPA:ELIS), with a market cap of €3.5b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, 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 just a partial view of the stock, and I’d encourage you to dig deeper yourself into ELIS here.

ELIS’s Debt (And Cash Flows)

ELIS's debt level has been constant at around €3.6b over the previous year including long-term debt. At this current level of debt, the current cash and short-term investment levels stands at €197m to keep the business going. On top of this, ELIS has produced cash from operations of €853m in the last twelve months, leading to an operating cash to total debt ratio of 24%, indicating that ELIS’s debt is appropriately covered by operating cash.

Can ELIS meet its short-term obligations with the cash in hand?

With current liabilities at €1.2b, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.86x. The current ratio is the number you get when you divide current assets by current liabilities.

Is ELIS’s debt level acceptable?

With total debt exceeding equity, ELIS 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. We can test if ELIS’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 ELIS, the ratio of 2.77x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as ELIS’s low interest coverage already puts the company at higher risk of default.

Next Steps:

ELIS’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. But, 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 ELIS has company-specific issues impacting its capital structure decisions. You should continue to research Elis to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for ELIS’s future growth? Take a look at our free research report of analyst consensus for ELIS’s outlook.
2. Valuation: What is ELIS 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 ELIS is currently mispriced by the market.
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.