Moda Bagno – N. Varveris S.A. (ATH:MODA): Time For A Financial Health Check

Investors are always looking for growth in small-cap stocks like Moda Bagno – N. Varveris S.A. (ATH:MODA), with a market cap of €9.2m. However, an important fact which most ignore is: how financially healthy is the business? Specialty Retail businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are inclined towards being 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. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into MODA here.

Does MODA produce enough cash relative to debt?

MODA has shrunken its total debt levels in the last twelve months, from €13m to €12m – this includes long-term debt. With this debt payback, MODA’s cash and short-term investments stands at €454k , ready to deploy into the business. On top of this, MODA has produced €1.1m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 9.5%, indicating that MODA’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In MODA’s case, it is able to generate 0.095x cash from its debt capital.

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

With current liabilities at €9.7m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.85x. Usually, for Specialty Retail companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

ATSE:MODA Historical Debt January 31st 19
ATSE:MODA Historical Debt January 31st 19

Is MODA’s debt level acceptable?

MODA is a relatively highly levered company with a debt-to-equity of 82%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 after interest and tax at least three times its net interest payments is considered financially sound. In MODA’s case, the ratio of 1.39x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.

Next Steps:

Although MODA’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how MODA has been performing in the past. You should continue to research Moda Bagno – N. Varveris to get a better picture of the small-cap by looking at:

  1. Valuation: What is MODA 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 MODA is currently mispriced by the market.
  2. Historical Performance: What has MODA’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
  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.

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 editorial-team@simplywallst.com.