How Financially Strong Is IMCD N.V. (AMS:IMCD)?
While small-cap stocks, such as IMCD N.V. (AMS:IMCD) with its market cap of €3.8b, 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 essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into IMCD here.
Does IMCD Produce Much Cash Relative To Its Debt?
Over the past year, IMCD has ramped up its debt from €552m to €696m , which includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at €85m , ready to be used for running the business. Moreover, IMCD has generated €114m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 16%, meaning that IMCD’s debt is not covered by operating cash.
Can IMCD pay its short-term liabilities?
Looking at IMCD’s €567m in current liabilities, the company has been able to meet these obligations given the level of current assets of €837m, with a current ratio of 1.48x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Trade Distributors 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.
Can IMCD service its debt comfortably?
With debt reaching 88% of equity, IMCD 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. We can test if IMCD’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 IMCD, the ratio of 7.23x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as IMCD’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although IMCD’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 IMCD has company-specific issues impacting its capital structure decisions. I recommend you continue to research IMCD to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for IMCD’s future growth? Take a look at our free research report of analyst consensus for IMCD’s outlook.
Valuation: What is IMCD 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 IMCD is currently mispriced by the market.
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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