Cogelec SA (EPA:COGEC) is a small-cap stock with a market capitalization of €73m. 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? Communications companies, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into COGEC here.
How much cash does COGEC generate through its operations?
Over the past year, COGEC has reduced its debt from €11m to €9m , which is made up of current and long term debt. With this debt payback, the current cash and short-term investment levels stands at €19m , ready to deploy into the business. Moreover, COGEC has generated €4m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 45%, signalling that COGEC’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In COGEC’s case, it is able to generate 0.45x cash from its debt capital.
Can COGEC pay its short-term liabilities?
At the current liabilities level of €11m liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.45x. However, anything above 3x may be considered excessive by some investors. They might argue COGEC is leaving too much capital in low-earning investments.
Can COGEC service its debt comfortably?
With a debt-to-equity ratio of 44%, COGEC can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if COGEC’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 COGEC, 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.
COGEC’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 COGEC’s financial health. Other important fundamentals need to be considered alongside. 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.