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While small-cap stocks, such as Buzzi Unicem S.p.A. (BIT:BZU) with its market cap of €3.3b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, this is not a comprehensive overview, so I suggest you dig deeper yourself into BZU here.
BZU’s Debt (And Cash Flows)
BZU's debt levels have fallen from €1.6b to €1.3b over the last 12 months , which includes long-term debt. With this debt repayment, BZU's cash and short-term investments stands at €440m , ready to be used for running the business. On top of this, BZU has generated €332m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 26%, indicating that BZU’s current level of operating cash is high enough to cover debt.
Can BZU meet its short-term obligations with the cash in hand?
With current liabilities at €771m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.81x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Basic Materials companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is BZU’s debt level acceptable?
With debt reaching 41% of equity, BZU may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether BZU 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 BZU's, case, the ratio of 8.77x suggests that interest is appropriately 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.
Although BZU’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 BZU has company-specific issues impacting its capital structure decisions. I recommend you continue to research Buzzi Unicem to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for BZU’s future growth? Take a look at our free research report of analyst consensus for BZU’s outlook.
- Valuation: What is BZU 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 BZU 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.