You Might Like Centrale del Latte d'Italia S.p.A. (BIT:CLI) But Do You Like Its Debt?
Investors are always looking for growth in small-cap stocks like Centrale del Latte d'Italia S.p.A. (BIT:CLI), with a market cap of €39m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, since poor capital management may bring about 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, this is just a partial view of the stock, and I suggest you dig deeper yourself into CLI here.
Does CLI Produce Much Cash Relative To Its Debt?
CLI has sustained its debt level by about €87m over the last 12 months which accounts for long term debt. At this current level of debt, CLI currently has €13m remaining in cash and short-term investments to keep the business going. Additionally, CLI has produced cash from operations of €4.9m over the same time period, resulting in an operating cash to total debt ratio of 5.7%, signalling that CLI’s current level of operating cash is not high enough to cover debt.
Can CLI meet its short-term obligations with the cash in hand?
At the current liabilities level of €68m, it appears that the company may not have an easy time meeting these commitments with a current assets level of €67m, leading to a current ratio of 0.99x. The current ratio is the number you get when you divide current assets by current liabilities.
Does CLI face the risk of succumbing to its debt-load?
Since total debt levels exceed equity, CLI is a highly leveraged company. 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 CLI's case, the ratio of 0.28x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as CLI’s low interest coverage already puts the company at higher risk of default.
Next Steps:
Although CLI’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven't considered other factors such as how CLI has been performing in the past. I suggest you continue to research Centrale del Latte d'Italia to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for CLI’s future growth? Take a look at our free research report of analyst consensus for CLI’s outlook.
Valuation: What is CLI 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 CLI 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.
