Investors are always looking for growth in small-cap stocks like Alcadon Group AB (publ) (STO:ALCA), with a market cap of kr484m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Electronic industry, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is essential. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into ALCA here.
How much cash does ALCA generate through its operations?
ALCA’s debt levels surged from kr152m to kr168m over the last 12 months , which includes long-term debt. With this rise in debt, ALCA currently has kr8.3m remaining in cash and short-term investments for investing into the business. On top of this, ALCA has produced cash from operations of kr41m over the same time period, leading to an operating cash to total debt ratio of 25%, signalling that ALCA’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ALCA’s case, it is able to generate 0.25x cash from its debt capital.
Can ALCA meet its short-term obligations with the cash in hand?
With current liabilities at kr130m, it appears that the company has been able to meet these commitments with a current assets level of kr179m, leading to a 1.38x current account ratio. Usually, for Electronic companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does ALCA face the risk of succumbing to its debt-load?
ALCA is a relatively highly levered company with a debt-to-equity of 90%. 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 ALCA’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 ALCA, the ratio of 9.32x suggests that interest is appropriately 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.
Although ALCA’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 ALCA’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Alcadon Group to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ALCA’s future growth? Take a look at our free research report of analyst consensus for ALCA’s outlook.
- Valuation: What is ALCA 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 ALCA 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 email@example.com.