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Investors are always looking for growth in small-cap stocks like Empresaria Group plc (LON:EMR), with a market cap of UK£41.91m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into EMR here.
How much cash does EMR generate through its operations?
EMR has built up its total debt levels in the last twelve months, from UK£30.80m to UK£37.90m , which is made up of current and long term debt. With this rise in debt, EMR’s cash and short-term investments stands at UK£25.90m for investing into the business. Moreover, EMR has generated UK£6.40m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 16.89%, meaning that EMR’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In EMR’s case, it is able to generate 0.17x cash from its debt capital.
Can EMR pay its short-term liabilities?
With current liabilities at UK£81.20m, it seems that the business is not able to meet these obligations given the level of current assets of UK£79.00m, with a current ratio of 0.97x below the prudent level of 3x.
Can EMR service its debt comfortably?
With a debt-to-equity ratio of 77.51%, EMR 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 check to see whether EMR 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 EMR’s, case, the ratio of 16.5x 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.
Next Steps:
EMR’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. Furthermore, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure EMR has company-specific issues impacting its capital structure decisions. I recommend you continue to research Empresaria Group to get a more holistic view of the stock by looking at: