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Investors are always looking for growth in small-cap stocks like Elecster Oyj (HEL:ELEAV), with a market cap of €34m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis 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. However, this is just a partial view of the stock, and I suggest you dig deeper yourself into ELEAV here.

Does ELEAV Produce Much Cash Relative To Its Debt?

Over the past year, ELEAV has maintained its debt levels at around €18m which accounts for long term debt. At this constant level of debt, the current cash and short-term investment levels stands at €7.5m to keep the business going. Additionally, ELEAV has generated cash from operations of €4.1m during the same period of time, leading to an operating cash to total debt ratio of 22%, meaning that ELEAV’s current level of operating cash is high enough to cover debt.

Can ELEAV meet its short-term obligations with the cash in hand?

With current liabilities at €13m, it appears that the company has been able to meet these obligations given the level of current assets of €34m, with a current ratio of 2.65x. The current ratio is calculated by dividing current assets by current liabilities. For Machinery 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.

Can ELEAV service its debt comfortably?

With debt reaching 70% of equity, ELEAV may be thought of as relatively highly levered. 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 ELEAV's case, the ratio of 5.03x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving ELEAV ample headroom to grow its debt facilities.

Next Steps:

Although ELEAV’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. Since there is also no concerns around ELEAV's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure ELEAV has company-specific issues impacting its capital structure decisions. You should continue to research Elecster Oyj to get a better picture of the small-cap by looking at:

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

2. Valuation: What is ELEAV 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 ELEAV 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.