While small-cap stocks, such as Ormester Vagyonvédelmi Nyrt (BUSE:ORMESTER) with its market cap of FT301.40M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into ORMESTER here.
How does ORMESTER’s operating cash flow stack up against its debt?
Over the past year, ORMESTER has ramped up its debt from FT66.56M to FT90.63M , which is made up of current and long term debt. With this rise in debt, the current cash and short-term investment levels stands at FT21.08M , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of ORMESTER’s operating efficiency ratios such as ROA here.
Can ORMESTER meet its short-term obligations with the cash in hand?
Looking at ORMESTER’s most recent FT199.01M liabilities, it seems that the business has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.71x, which is below the prudent industry ratio of 3x.
Can ORMESTER service its debt comfortably?ORMESTER is a relatively highly levered company with a debt-to-equity of 41.18%. 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 ORMESTER 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 ORMESTER’s, case, the ratio of 4.45x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving ORMESTER ample headroom to grow its debt facilities.
ORMESTER’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure ORMESTER has company-specific issues impacting its capital structure decisions. You should continue to research Ormester Vagyonvédelmi Nyrt to get a better picture of the stock by looking at:
- 1. Historical Performance: What has ORMESTER’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.
- 2. 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.