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Investors are always looking for growth in small-cap stocks like ABO-Group Environment NV (EBR:ABO), with a market cap of €25m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. 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 recommend you dig deeper yourself into ABO here.
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Does ABO Produce Much Cash Relative To Its Debt?
ABO's debt levels surged from €11m to €13m over the last 12 months – this includes long-term debt. With this rise in debt, ABO's cash and short-term investments stands at €4.8m , ready to be used for running the business. Additionally, ABO has produced cash from operations of €3.3m during the same period of time, leading to an operating cash to total debt ratio of 24%, meaning that ABO’s current level of operating cash is high enough to cover debt.
Can ABO pay its short-term liabilities?
Looking at ABO’s €21m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of €23m, with a current ratio of 1.11x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Commercial Services companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is ABO’s debt level acceptable?
ABO is a relatively highly levered company with a debt-to-equity of 89%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In ABO's case, the ratio of 3.2x suggests that interest is appropriately 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.
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ABO’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around ABO's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for ABO's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research ABO-Group Environment to get a more holistic view of the small-cap by looking at: