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While small-cap stocks, such as Micropole S.A. (EPA:MUN) with its market cap of €38m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, 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 not a comprehensive overview, so I suggest you dig deeper yourself into MUN here.

Does MUN Produce Much Cash Relative To Its Debt?

MUN's debt levels have fallen from €26m to €24m over the last 12 months , which includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at €12m , ready to be used for running the business. On top of this, MUN has generated cash from operations of €2.3m in the last twelve months, leading to an operating cash to total debt ratio of 9.6%, indicating that MUN’s operating cash is less than its debt.

Can MUN pay its short-term liabilities?

With current liabilities at €58m, the company has been able to meet these commitments with a current assets level of €64m, leading to a 1.11x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for IT companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Can MUN service its debt comfortably?

MUN is a relatively highly levered company with a debt-to-equity of 49%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In MUN's case, the ratio of 11.64x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as MUN’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although MUN’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 MUN has been performing in the past. I suggest you continue to research Micropole to get a better picture of the small-cap by looking at:

1. Historical Performance: What has MUN'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.

2. 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.