Investors are always looking for growth in small-cap stocks like Socfinaf SA. (BDL:SOFAF), with a market cap of €264.24M. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into SOFAF here.
Does SOFAF generate enough cash through operations?
Over the past year, SOFAF has ramped up its debt from €171.86M to €203.13M , which is made up of current and long term debt. With this increase in debt, SOFAF currently has €27.44M remaining in cash and short-term investments , ready to deploy into the business. Moreover, SOFAF has generated €50.60M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 24.91%, indicating that SOFAF’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SOFAF’s case, it is able to generate 0.25x cash from its debt capital.
Can SOFAF pay its short-term liabilities?
Looking at SOFAF’s most recent €250.97M liabilities, the company is not able to meet these obligations given the level of current assets of €134.00M, with a current ratio of 0.53x below the prudent level of 3x.
Can SOFAF service its debt comfortably?
With a debt-to-equity ratio of 48.67%, SOFAF can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 after interest and tax at least three times its net interest payments is considered financially sound. In SOFAF’s case, the ratio of 9.42x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as SOFAF’s high interest coverage is seen as responsible and safe practice.
Next Steps:
SOFAF’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Furthermore, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how SOFAF has been performing in the past. You should continue to research Socfinaf to get a better picture of the stock by looking at: