In This Article:
Investors are always looking for growth in small-cap stocks like Ovzon AB (publ) (STO:OVZON), with a market cap of kr265m. However, an important fact which most ignore is: how financially healthy is the business? Telecom businesses operating in the environment facing headwinds from current disruption, especially ones that are currently loss-making, tend to be high risk. Assessing first and foremost the financial health is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into OVZON here.
Does OVZON produce enough cash relative to debt?
Over the past year, OVZON has reduced its debt from kr185m to kr71m , which also accounts for long term debt. With this reduction in debt, the current cash and short-term investment levels stands at kr104m , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of OVZON’s operating efficiency ratios such as ROA here.
Can OVZON meet its short-term obligations with the cash in hand?
Looking at OVZON’s kr100m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.36x. Generally, for Telecom companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does OVZON face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, OVZON is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since OVZON is presently unprofitable, 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:
OVZON’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 OVZON’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 OVZON has company-specific issues impacting its capital structure decisions. I recommend you continue to research Ovzon to get a more holistic view of the small-cap by looking at: