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Atrium Ljungberg AB (publ) (STO:ATRLJ B) is a small-cap stock with a market capitalization of kr22b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Understanding the company's financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is just a partial view of the stock, and I suggest you dig deeper yourself into ATRLJ B here.
ATRLJ B’s Debt (And Cash Flows)
ATRLJ B's debt levels surged from kr18b to kr20b over the last 12 months , which includes long-term debt. With this increase in debt, ATRLJ B currently has kr420m remaining in cash and short-term investments to keep the business going. Additionally, ATRLJ B has produced kr1.3b in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 6.3%, indicating that ATRLJ B’s current level of operating cash is not high enough to cover debt.
Does ATRLJ B’s liquid assets cover its short-term commitments?
At the current liabilities level of kr1.6b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.13x. The current ratio is calculated by dividing current assets by current liabilities. For Real Estate companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Does ATRLJ B face the risk of succumbing to its debt-load?
ATRLJ B is a highly-leveraged company with debt exceeding equity by over 100%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if ATRLJ B’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 ATRLJ B, the ratio of 2.84x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
Although ATRLJ B’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I'm sure ATRLJ B has company-specific issues impacting its capital structure decisions. You should continue to research Atrium Ljungberg to get a better picture of the small-cap by looking at: