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Cogelec SA (EPA:COGEC) is a small-cap stock with a market capitalization of €59m. 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? Companies operating in the Communications industry, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into COGEC here.
How does COGEC’s operating cash flow stack up against its debt?
COGEC has shrunken its total debt levels in the last twelve months, from €11m to €9.3m – this includes long-term debt. With this debt repayment, COGEC currently has €19m remaining in cash and short-term investments , ready to deploy into the business. Moreover, COGEC has generated €4.2m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 45%, indicating that COGEC’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In COGEC’s case, it is able to generate 0.45x cash from its debt capital.
Does COGEC’s liquid assets cover its short-term commitments?
With current liabilities at €11m, it appears that the company has been able to meet these obligations given the level of current assets of €37m, with a current ratio of 3.45x. However, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Can COGEC service its debt comfortably?
COGEC is a relatively highly levered company with a debt-to-equity of 44%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether COGEC is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In COGEC’s, case, the ratio of 14.52x 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.
Although COGEC’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 COGEC’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how COGEC has been performing in the past. You should continue to research Cogelec to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for COGEC’s future growth? Take a look at our free research report of analyst consensus for COGEC’s outlook.
- Valuation: What is COGEC 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 COGEC 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.