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Cloetta AB (publ) (STO:CLA B) is a small-cap stock with a market capitalization of kr8.5b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Assessing first and foremost the financial health is essential, 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 just a partial view of the stock, and I’d encourage you to dig deeper yourself into CLA B here.
Does CLA B Produce Much Cash Relative To Its Debt?
CLA B's debt levels surged from kr2.7b to kr2.9b over the last 12 months , which accounts for long term debt. With this rise in debt, the current cash and short-term investment levels stands at kr208m , ready to be used for running the business. On top of this, CLA B has generated cash from operations of kr689m in the last twelve months, leading to an operating cash to total debt ratio of 23%, meaning that CLA B’s debt is appropriately covered by operating cash.
Can CLA B meet its short-term obligations with the cash in hand?
Looking at CLA B’s kr1.9b in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of kr2.1b, with a current ratio of 1.09x. The current ratio is calculated by dividing current assets by current liabilities. For Food companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does CLA B face the risk of succumbing to its debt-load?
CLA B is a relatively highly levered company with a debt-to-equity of 69%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if CLA B’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For CLA B, the ratio of 12.69x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as CLA B’s high interest coverage is seen as responsible and safe practice.
CLA B’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for CLA B's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Cloetta to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CLA B’s future growth? Take a look at our free research report of analyst consensus for CLA B’s outlook.
- Valuation: What is CLA B 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 CLA B 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.