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Amoéba S.A. (EPA:AMEBA) is a small-cap stock with a market capitalization of €15m. 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? Given that AMEBA is not presently profitable, it’s crucial to understand the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into AMEBA here.
Does AMEBA Produce Much Cash Relative To Its Debt?
AMEBA's debt level has been constant at around €7.4m over the previous year including long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at €3.5m to keep the business going. We note it produced negative cash flow over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of AMEBA’s operating efficiency ratios such as ROA here.
Can AMEBA pay its short-term liabilities?
Looking at AMEBA’s €1.7m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of €4.7m, leading to a 2.74x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Chemicals companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does AMEBA face the risk of succumbing to its debt-load?
Since total debt levels exceed equity, AMEBA is a highly leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since AMEBA 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 AMEBA’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 AMEBA has been performing in the past. I suggest you continue to research Amoéba to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for AMEBA’s future growth? Take a look at our free research report of analyst consensus for AMEBA’s outlook.
- Historical Performance: What has AMEBA'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.
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 email@example.com. 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.