Investors are always looking for growth in small-cap stocks like Rosier SA (EBR:ENGB), with a market cap of €39m. However, an important fact which most ignore is: how financially healthy is the business? Given that ENGB is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into ENGB here.
Does ENGB produce enough cash relative to debt?
ENGB has built up its total debt levels in the last twelve months, from €30m to €34m made up of predominantly near term debt. With this rise in debt, ENGB currently has €471k remaining in cash and short-term investments , ready to deploy into the business. Additionally, ENGB has generated cash from operations of €2.5m during the same period of time, leading to an operating cash to total debt ratio of 7.5%, signalling that ENGB’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In ENGB’s case, it is able to generate 0.075x cash from its debt capital.
Can ENGB pay its short-term liabilities?
At the current liabilities level of €54m, it seems that the business has been able to meet these commitments with a current assets level of €54m, leading to a 1x current account ratio. Generally, for Chemicals 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 ENGB face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 84%, ENGB 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. But since ENGB is currently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although ENGB’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. Keep in mind I haven’t considered other factors such as how ENGB has been performing in the past. You should continue to research Rosier to get a more holistic view of the small-cap by looking at:
- Historical Performance: What has ENGB’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.