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Berentzen-Gruppe Aktiengesellschaft (FRA:BEZ) is a small-cap stock with a market capitalization of €66.7m. 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 vital, since poor capital management may bring about 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. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into BEZ here.
How does BEZ’s operating cash flow stack up against its debt?
Over the past year, BEZ has reduced its debt from €51.4m to €8.8m – this includes both the current and long-term debt. With this debt repayment, BEZ’s cash and short-term investments stands at €16.5m for investing into the business. Additionally, BEZ has produced cash from operations of €6.7m in the last twelve months, leading to an operating cash to total debt ratio of 76.5%, signalling that BEZ’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 BEZ’s case, it is able to generate 0.77x cash from its debt capital.
Does BEZ’s liquid assets cover its short-term commitments?
At the current liabilities level of €74.8m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.05x. For Beverage companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does BEZ face the risk of succumbing to its debt-load?
With debt at 19.4% of equity, BEZ may be thought of as appropriately levered. This range is considered safe as BEZ is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if BEZ’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 BEZ, the ratio of 2.7x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
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BEZ’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for BEZ’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Berentzen-Gruppe to get a more holistic view of the stock by looking at: