While small-cap stocks, such as Medicon Hellas SA (ATH:MEDIC) with its market cap of €5.3m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Medical Equipment companies, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into MEDIC here.
Does MEDIC produce enough cash relative to debt?
MEDIC’s debt levels have fallen from €23m to €15m over the last 12 months , which includes long-term debt. With this debt payback, the current cash and short-term investment levels stands at €4.3m , ready to deploy into the business. On top of this, MEDIC has produced cash from operations of €5.5m in the last twelve months, resulting in an operating cash to total debt ratio of 36%, meaning that MEDIC’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In MEDIC’s case, it is able to generate 0.36x cash from its debt capital.
Does MEDIC’s liquid assets cover its short-term commitments?
At the current liabilities level of €8.2m, the company has been able to meet these commitments with a current assets level of €18m, leading to a 2.24x current account ratio. Generally, for Medical Equipment companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can MEDIC service its debt comfortably?
Since total debt levels have outpaced equities, MEDIC is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if MEDIC’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 MEDIC, the ratio of 3.21x 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 MEDIC’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 MEDIC’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for MEDIC’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Medicon Hellas to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for MEDIC’s future growth? Take a look at our free research report of analyst consensus for MEDIC’s outlook.
- Valuation: What is MEDIC 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 MEDIC 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.