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Investors are always looking for growth in small-cap stocks like Interpump Group S.p.A. (BIT:IP), with a market cap of €3.4b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. However, this is not a comprehensive overview, so I recommend you dig deeper yourself into IP here.
Does IP Produce Much Cash Relative To Its Debt?
IP’s debt level has been constant at around €405m over the previous year – this includes long-term debt. At this stable level of debt, IP’s cash and short-term investments stands at €118m to keep the business going. On top of this, IP has produced €149m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 37%, indicating that IP’s operating cash is sufficient to cover its debt.
Can IP meet its short-term obligations with the cash in hand?
At the current liabilities level of €446m, it seems that the business has been able to meet these commitments with a current assets level of €791m, leading to a 1.77x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Machinery companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can IP service its debt comfortably?
IP is a relatively highly levered company with a debt-to-equity of 47%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In IP’s case, the ratio of 77.12x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving IP ample headroom to grow its debt facilities.
Although IP’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. I admit this is a fairly basic analysis for IP’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Interpump Group to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for IP’s future growth? Take a look at our free research report of analyst consensus for IP’s outlook.
- Valuation: What is IP 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 IP 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 email@example.com. 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.