Investors are always looking for growth in small-cap stocks like BioDue SpA (BIT:BIO2), with a market cap of €60.4m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is 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, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into BIO2 here.
How much cash does BIO2 generate through its operations?
Over the past year, BIO2 has ramped up its debt from €5.8m to €6.9m , which comprises of short- and long-term debt. With this rise in debt, BIO2 currently has €1.0m remaining in cash and short-term investments for investing into the business. On top of this, BIO2 has produced €2.4m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 34.4%, meaning that BIO2’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In BIO2’s case, it is able to generate 0.34x cash from its debt capital.
Can BIO2 meet its short-term obligations with the cash in hand?
With current liabilities at €11.2m, the company has been able to meet these commitments with a current assets level of €19.1m, leading to a 1.7x current account ratio. Generally, for Personal Products companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is BIO2’s debt level acceptable?
BIO2’s level of debt is appropriate relative to its total equity, at 33.8%. BIO2 is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether BIO2 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In BIO2’s, case, the ratio of 56.86x suggests that interest is comfortably 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.
BIO2’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure BIO2 has company-specific issues impacting its capital structure decisions. I suggest you continue to research BioDue to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BIO2’s future growth? Take a look at our free research report of analyst consensus for BIO2’s outlook.
- Valuation: What is BIO2 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether BIO2 is currently mispriced by the market.
- 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 firstname.lastname@example.org.