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While small-cap stocks, such as STEF SA. (ENXTPA:STF) with its market cap of €1.25B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to 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, I know these factors are very high-level, so I suggest you dig deeper yourself into STF here.
Does STF generate an acceptable amount of cash through operations?
STF’s debt level has been constant at around €585.59M over the previous year comprising of short- and long-term debt. At this current level of debt, STF currently has €59.42M remaining in cash and short-term investments , ready to deploy into the business. Additionally, STF has produced cash from operations of €183.55M during the same period of time, resulting in an operating cash to total debt ratio of 31.34%, indicating that STF’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 STF’s case, it is able to generate 0.31x cash from its debt capital.
Can STF pay its short-term liabilities?
With current liabilities at €1.08B, the company is not able to meet these obligations given the level of current assets of €740.89M, with a current ratio of 0.68x below the prudent level of 3x.
Is STF’s debt level acceptable?
With a debt-to-equity ratio of 93.18%, STF 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 test if STF’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 STF, the ratio of 14.24x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as STF’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although STF’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. Though its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure STF has company-specific issues impacting its capital structure decisions. You should continue to research STEF to get a more holistic view of the stock by looking at: