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While small-cap stocks, such as B.V. Delftsch Aardewerkfabriek "De Porceleyne Fles Anno 1653" (AMS:PORF) with its market cap of €8.4m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that PORF is not presently profitable, it’s vital to understand the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, these checks don't give you a full picture, so I suggest you dig deeper yourself into PORF here.
PORF’s Debt (And Cash Flows)
PORF has built up its total debt levels in the last twelve months, from €2.5m to €8.9m , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at €4.3m , ready to be used for running the business. Moving on, operating cash flow was negative over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can assess some of PORF’s operating efficiency ratios such as ROA here.
Can PORF meet its short-term obligations with the cash in hand?
With current liabilities at €2.0m, it appears that the company has been able to meet these obligations given the level of current assets of €7.3m, with a current ratio of 3.72x. The current ratio is the number you get when you divide current assets by current liabilities. However, a ratio above 3x may be considered excessive by some investors.
Can PORF service its debt comfortably?
PORF is a relatively highly levered company with a debt-to-equity of 62%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. However, since PORF is presently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Although PORF’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 PORF'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 PORF has company-specific issues impacting its capital structure decisions. You should continue to research B.V. Delftsch Aardewerkfabriek De Porceleyne Fles Anno 1653 to get a better picture of the small-cap by looking at: