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Centrale del Latte d’Italia Sp.A (BIT:CLI) is a small-cap stock with a market capitalization of €46.76M. 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 CLI is loss-making right now, it’s vital to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I recommend you dig deeper yourself into CLI here.
Does CLI generate an acceptable amount of cash through operations?
Over the past year, CLI has ramped up its debt from €69.75M to €87.86M – this includes both the current and long-term debt. With this rise in debt, CLI’s cash and short-term investments stands at €25.47M , ready to deploy into the business. Moreover, CLI has produced €7.40M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 8.43%, meaning that CLI’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable companies since metrics such as return on asset (ROA) requires positive earnings. In CLI’s case, it is able to generate 0.084x cash from its debt capital.
Does CLI’s liquid assets cover its short-term commitments?
At the current liabilities level of €77.37M liabilities, the company has been able to meet these obligations given the level of current assets of €78.61M, with a current ratio of 1.02x. Usually, for Food companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is CLI’s debt level acceptable?
CLI 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. But since CLI is currently unprofitable, 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:
CLI’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 exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure CLI has company-specific issues impacting its capital structure decisions. You should continue to research Centrale del Latte d’Italia to get a better picture of the stock by looking at: