How Financially Strong Is Les Nouveaux Constructeurs SA (EPA:LNC)?
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Investors are always looking for growth in small-cap stocks like Les Nouveaux Constructeurs SA (EPA:LNC), with a market cap of €675m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, these checks don't give you a full picture, so I suggest you dig deeper yourself into LNC here.
LNC’s Debt (And Cash Flows)
Over the past year, LNC has ramped up its debt from €260m to €327m – this includes long-term debt. With this increase in debt, LNC currently has €116m remaining in cash and short-term investments to keep the business going. Additionally, LNC has generated €33m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 10%, signalling that LNC’s debt is not covered by operating cash.
Does LNC’s liquid assets cover its short-term commitments?
Looking at LNC’s €535m in current liabilities, the company has been able to meet these obligations given the level of current assets of €1.0b, with a current ratio of 1.91x. 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 since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can LNC service its debt comfortably?
With a debt-to-equity ratio of 74%, LNC 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 check to see whether LNC 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 LNC's, case, the ratio of 59.72x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as LNC’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although LNC’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 LNC has been performing in the past. I recommend you continue to research Les Nouveaux Constructeurs to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for LNC’s future growth? Take a look at our free research report of analyst consensus for LNC’s outlook.
Valuation: What is LNC 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 LNC 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.
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.
