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GFT Technologies SE (ETR:GFT) is a small-cap stock with a market capitalization of €194m. 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? Understanding the company's financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is just a partial view of the stock, and I suggest you dig deeper yourself into GFT here.

Does GFT Produce Much Cash Relative To Its Debt?

Over the past year, GFT has maintained its debt levels at around €112m – this includes long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at €63m to keep the business going. On top of this, GFT has generated €47m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 42%, signalling that GFT’s operating cash is sufficient to cover its debt.

Can GFT pay its short-term liabilities?

With current liabilities at €110m, the company has been able to meet these obligations given the level of current assets of €179m, with a current ratio of 1.63x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for IT companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Is GFT’s debt level acceptable?

With a debt-to-equity ratio of 86%, GFT can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether GFT 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 GFT's, case, the ratio of 11.21x 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.

Next Steps:

GFT’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. Since there is also no concerns around GFT's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for GFT's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research GFT Technologies to get a more holistic view of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for GFT’s future growth? Take a look at our free research report of analyst consensus for GFT’s outlook.

2. Valuation: What is GFT 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 GFT is currently mispriced by the market.

3. 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 editorial-team@simplywallst.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.