Is Eurasia Fonciere Investissements Société Anonyme's (EPA:EFI) Balance Sheet A Threat To Its Future?
Investors are always looking for growth in small-cap stocks like Eurasia Fonciere Investissements Société Anonyme (EPA:EFI), with a market cap of €17m. However, an important fact which most ignore is: how financially healthy is the business? 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. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is just a partial view of the stock, and I recommend you dig deeper yourself into EFI here.
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Does EFI Produce Much Cash Relative To Its Debt?
Over the past year, EFI has reduced its debt from €18m to €12m , which also accounts for long term debt. With this debt repayment, EFI currently has €571k remaining in cash and short-term investments , ready to be used for running the business. We note it produced negative cash flow over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can assess some of EFI’s operating efficiency ratios such as ROA here.
Can EFI pay its short-term liabilities?
With current liabilities at €10m, the company has been able to meet these commitments with a current assets level of €22m, leading to a 2.15x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Real Estate companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does EFI face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 46%, EFI can be considered as an above-average leveraged company. 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 EFI’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 EFI, the ratio of 1.79x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as EFI’s low interest coverage already puts the company at higher risk of default.
Next Steps:
Although EFI’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 EFI has company-specific issues impacting its capital structure decisions. I suggest you continue to research Eurasia Fonciere Investissements Société Anonyme to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for EFI’s future growth? Take a look at our free research report of analyst consensus for EFI’s outlook.
Historical Performance: What has EFI'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.
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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.
