Investors are always looking for growth in small-cap stocks like Groupe Open (ENXTPA:OPN), with a market cap of €305.68M. However, an important fact which most ignore is: how financially healthy is the business? IT companies, even ones that are profitable, tend to be high 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. However, since I only look at basic financial figures, I recommend you dig deeper yourself into OPN here.
How does OPN’s operating cash flow stack up against its debt?
OPN has shrunken its total debt levels in the last twelve months, from €28.80M to €20.80M , which is made up of current and long term debt. With this debt payback, the current cash and short-term investment levels stands at €33.80M , ready to deploy into the business. Moreover, OPN has generated cash from operations of €20.20M over the same time period, resulting in an operating cash to total debt ratio of 97.12%, meaning that OPN’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In OPN’s case, it is able to generate 0.97x cash from its debt capital.
Can OPN meet its short-term obligations with the cash in hand?
With current liabilities at €107.50M, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.12x. Usually, for IT companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can OPN service its debt comfortably?
With debt at 18.01% of equity, OPN may be thought of as appropriately levered. This range is considered safe as OPN is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if OPN’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 OPN, the ratio of 27x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving OPN ample headroom to grow its debt facilities.
Next Steps:
OPN has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for OPN’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Groupe Open to get a better picture of the stock by looking at: