What does Piovan S.p.A.'s (BIT:PVN) Balance Sheet Tell Us About Its Future?

Investors are always looking for growth in small-cap stocks like Piovan S.p.A. (BIT:PVN), with a market cap of €415m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company's financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into PVN here.

How does PVN’s operating cash flow stack up against its debt?

Over the past year, PVN has reduced its debt from €36m to €31m – this includes long-term debt. With this debt repayment, PVN currently has €26m remaining in cash and short-term investments for investing into the business. Additionally, PVN has generated cash from operations of €13m over the same time period, leading to an operating cash to total debt ratio of 41%, meaning that PVN’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In PVN’s case, it is able to generate 0.41x cash from its debt capital.

Can PVN pay its short-term liabilities?

At the current liabilities level of €93m, the company has been able to meet these commitments with a current assets level of €128m, leading to a 1.38x current account ratio. For Machinery companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Does PVN face the risk of succumbing to its debt-load?

With debt reaching 61% of equity, PVN may be thought of as relatively highly levered. 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 PVN’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 PVN, the ratio of 187x 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.

Next Steps:

PVN’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. Since there is also no concerns around PVN's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how PVN has been performing in the past. I recommend you continue to research Piovan to get a better picture of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for PVN’s future growth? Take a look at our free research report of analyst consensus for PVN’s outlook.
2. Valuation: What is PVN 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 PVN is currently mispriced by the market.
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.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.