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Investors are always looking for growth in small-cap stocks like LU-VE SpA (BIT:LUVE), with a market cap of €230m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. 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’d encourage you to dig deeper yourself into LUVE here.
How does LUVE’s operating cash flow stack up against its debt?
Over the past year, LUVE has reduced its debt from €168m to €157m – this includes both the current and long-term debt. With this debt payback, LUVE currently has €85m remaining in cash and short-term investments , ready to deploy into the business. On top of this, LUVE has generated €15m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 9.4%, indicating that LUVE’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In LUVE’s case, it is able to generate 0.094x cash from its debt capital.
Does LUVE’s liquid assets cover its short-term commitments?
With current liabilities at €137m, the company has been able to meet these commitments with a current assets level of €209m, leading to a 1.53x current account ratio. Generally, for Building companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does LUVE face the risk of succumbing to its debt-load?
LUVE is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In LUVE’s case, the ratio of 12.64x suggests that interest is comfortably 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.
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At its current level of cash flow coverage, LUVE has room for improvement to better cushion for events which may require debt repayment. Though, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how LUVE has been performing in the past. I recommend you continue to research LU-VE to get a more holistic view of the stock by looking at: