Stock Analysis

What Investors Should Know About Rosss Sp.A.'s (BIT:ROS) Financial Strength

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Rosss Sp.A. (BIT:ROS) is a small-cap stock with a market capitalization of €13.07M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into ROS here.

Does ROS generate an acceptable amount of cash through operations?

ROS has sustained its debt level by about €6.10M over the last 12 months – this includes both the current and long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at €1.93M for investing into the business. Additionally, ROS has generated cash from operations of €1.72M during the same period of time, resulting in an operating cash to total debt ratio of 28.23%, indicating that ROS’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ROS’s case, it is able to generate 0.28x cash from its debt capital.

Does ROS’s liquid assets cover its short-term commitments?

With current liabilities at €12.06M, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.13x. Usually, for Commercial Services companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

BIT:ROS Historical Debt Mar 20th 18
BIT:ROS Historical Debt Mar 20th 18

Is ROS’s debt level acceptable?

ROS is a highly-leveraged company with debt exceeding equity by over 100%. 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 ROS’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 ROS, the ratio of 8.71x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as ROS’s high interest coverage is seen as responsible and safe practice.

Next Steps:

ROS’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. 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 ROS's financial health. Other important fundamentals need to be considered alongside. You should continue to research Rosss to get a more holistic view of the small-cap by looking at:

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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.