While small-cap stocks, such as Caleffi S.p.A. (BIT:CLF) with its market cap of €22m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since CLF is loss-making right now, it’s vital to assess the current state of its operations and pathway to profitability. 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 suggest you dig deeper yourself into CLF here.
How much cash does CLF generate through its operations?
Over the past year, CLF has reduced its debt from €16m to €15m , which also accounts for long term debt. With this reduction in debt, CLF currently has €1.6m remaining in cash and short-term investments for investing into the business. Additionally, CLF has generated €310k in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 2.1%, indicating that CLF’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making businesses since metrics such as return on asset (ROA) requires a positive net income. In CLF’s case, it is able to generate 0.021x cash from its debt capital.
Can CLF pay its short-term liabilities?
Looking at CLF’s €21m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of €35m, with a current ratio of 1.67x. Usually, for Luxury companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is CLF’s debt level acceptable?
CLF 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. Though, since CLF is currently 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 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. 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 small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CLF’s future growth? Take a look at our free research report of analyst consensus for CLF’s outlook.
- 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.
- 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.