Investors are always looking for growth in small-cap stocks like Valora Holding AG (SWX:VALN), with a market cap of CHF1.27B. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Specialty Retail industry facing headwinds from current disruption, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into VALN here.
Does VALN generate an acceptable amount of cash through operations?
VALN’s debt levels surged from CHF361.12M to CHF392.08M over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, VALN’s cash and short-term investments stands at CHF152.52M for investing into the business. Additionally, VALN has generated CHF114.56M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 29.22%, signalling that VALN’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 VALN’s case, it is able to generate 0.29x cash from its debt capital.
Can VALN meet its short-term obligations with the cash in hand?
With current liabilities at CHF469.39M, it appears that the company has not been able to meet these commitments with a current assets level of CHF434.44M, leading to a 0.93x current account ratio. which is under the appropriate industry ratio of 3x.
Can VALN service its debt comfortably?
With a debt-to-equity ratio of 53.13%, VALN can be considered as an above-average leveraged 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 test if VALN’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 VALN, the ratio of 7.02x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as VALN’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although VALN’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for VALN’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Valora Holding to get a more holistic view of the stock by looking at: