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ERAMET S.A. (EPA:ERA) is a small-cap stock with a market capitalization of €1.5b. 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? Understanding the company’s financial health becomes 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 just a partial view of the stock, and I’d encourage you to dig deeper yourself into ERA here.
ERA’s Debt (And Cash Flows)
ERA has shrunk its total debt levels in the last twelve months, from €2.3b to €2.1b – this includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at €1.4b to keep the business going. Additionally, ERA has produced cash from operations of €437m during the same period of time, leading to an operating cash to total debt ratio of 21%, signalling that ERA’s debt is appropriately covered by operating cash.
Can ERA meet its short-term obligations with the cash in hand?
At the current liabilities level of €1.4b, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.11x. The current ratio is calculated by dividing current assets by current liabilities. For Metals and Mining 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.
Does ERA face the risk of succumbing to its debt-load?
ERA is a highly-leveraged company with debt exceeding equity by over 100%. 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 ERA’s case, the ratio of 5.89x 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 ERA’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 ERA’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 ERA has company-specific issues impacting its capital structure decisions. You should continue to research ERAMET to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ERA’s future growth? Take a look at our free research report of analyst consensus for ERA’s outlook.
- Valuation: What is ERA 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 ERA 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.