Medicon Hellas S.A. (ATH:MEDIC) is a small-cap stock with a market capitalization of €5.6m. 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? Medical Equipment companies, even ones that are profitable, are inclined towards being higher risk. So, understanding the company’s financial health becomes crucial. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into MEDIC here.
How much cash does MEDIC generate through its operations?
MEDIC’s debt levels have fallen from €23m to €15m over the last 12 months , which includes long-term debt. With this reduction in debt, MEDIC currently has €4.3m remaining in cash and short-term investments , ready to deploy into the business. Moreover, MEDIC has produced €5.5m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 36%, meaning that MEDIC’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 MEDIC’s case, it is able to generate 0.36x cash from its debt capital.
Can MEDIC meet its short-term obligations with the cash in hand?
Looking at MEDIC’s €8.2m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of €18m, leading to a 2.24x current account ratio. Usually, for Medical Equipment 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 MEDIC’s debt level acceptable?
With total debt exceeding equities, MEDIC is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether MEDIC is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In MEDIC’s, case, the ratio of 3.21x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving MEDIC ample headroom to grow its debt facilities.
Next Steps:
Although MEDIC’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. Keep in mind I haven’t considered other factors such as how MEDIC has been performing in the past. I suggest you continue to research Medicon Hellas to get a more holistic view of the small-cap by looking at: