Caleffi SpA (BIT:CLF) is a small-cap stock with a market capitalization of €22.90m. 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? Since CLF is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into CLF here.
Does CLF produce enough cash relative to debt?
Over the past year, CLF has ramped up its debt from €15.22m to €17.33m , which is made up of current and long term debt. With this growth in debt, the current cash and short-term investment levels stands at €2.56m for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of CLF’s operating efficiency ratios such as ROA here.
Can CLF pay its short-term liabilities?
Looking at CLF’s most recent €23.74m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.65x. Generally, for Luxury companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can CLF service its debt comfortably?
Since total debt levels have outpaced equities, CLF is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since CLF is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.Next Steps:
CLF’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how CLF has been performing in the past. You should continue to research Caleffi to get a more holistic view of the stock by looking at:
- Valuation: What is CLF 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 CLF is currently mispriced by the market.
- Historical Performance: What has CLF’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.
- 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.