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Investors are always looking for growth in small-cap stocks like SNP Schneider-Neureither & Partner SE (FRA:SHF), with a market cap of €108m. However, an important fact which most ignore is: how financially healthy is the business? IT companies, especially ones that are currently loss-making, are more likely to be higher risk. So, understanding the company’s financial health becomes essential. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into SHF here.
Does SHF produce enough cash relative to debt?
SHF’s debt levels surged from €41m to €44m over the last 12 months , which accounts for long term debt. With this increase in debt, SHF currently has €17m remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of SHF’s operating efficiency ratios such as ROA here.
Does SHF’s liquid assets cover its short-term commitments?
With current liabilities at €30m, the company has been able to meet these obligations given the level of current assets of €54m, with a current ratio of 1.79x. Usually, for IT 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.
Does SHF face the risk of succumbing to its debt-load?
SHF is a relatively highly levered company with a debt-to-equity of 97%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since SHF is presently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
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Although SHF’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. Since there is also no concerns around SHF’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure SHF has company-specific issues impacting its capital structure decisions. I recommend you continue to research SNP Schneider-Neureither & Partner to get a better picture of the small-cap by looking at: