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Elecster Oyj (HLSE:ELEAV) is a small-cap stock with a market capitalization of €40.85M. 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? So, understanding the company’s financial health becomes essential, 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. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into ELEAV here.
How does ELEAV’s operating cash flow stack up against its debt?
Over the past year, ELEAV has maintained its debt levels at around €18.94M comprising of short- and long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at €7.52M for investing into the business. Additionally, ELEAV has generated cash from operations of €3.95M in the last twelve months, resulting in an operating cash to total debt ratio of 20.87%, meaning that ELEAV’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ELEAV’s case, it is able to generate 0.21x cash from its debt capital.
Can ELEAV pay its short-term liabilities?
Looking at ELEAV’s most recent €10.94M liabilities, the company has been able to meet these obligations given the level of current assets of €33.73M, with a current ratio of 3.08x. Though, a ratio greater than 3x may be considered as too high, as ELEAV could be holding too much capital in a low-return investment environment.
Can ELEAV service its debt comfortably?
With a debt-to-equity ratio of 74.07%, ELEAV can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether ELEAV 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 ELEAV’s, case, the ratio of 9.33x suggests that interest is appropriately 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.