Elvalhalcor Hellenic Copper and Aluminium Industry S.A. (ATH:XAKO) is a small-cap stock with a market capitalization of €613m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Understanding the company's financial health becomes 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 not a comprehensive overview, so I’d encourage you to dig deeper yourself into XAKO here.

XAKO’s Debt (And Cash Flows)

XAKO's debt level has been constant at around €578m over the previous year including long-term debt. At this stable level of debt, XAKO's cash and short-term investments stands at €34m , ready to be used for running the business. On top of this, XAKO has produced cash from operations of €94m in the last twelve months, leading to an operating cash to total debt ratio of 16%, meaning that XAKO’s operating cash is less than its debt.

Can XAKO pay its short-term liabilities?

With current liabilities at €465m, it seems that the business has been able to meet these obligations given the level of current assets of €780m, with a current ratio of 1.68x. The current ratio is calculated by dividing current assets by current liabilities. For Metals and Mining companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Does XAKO face the risk of succumbing to its debt-load?

XAKO is a relatively highly levered company with a debt-to-equity of 79%. 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 XAKO's case, the ratio of 3.76x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving XAKO ample headroom to grow its debt facilities.

Next Steps:

XAKO’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around XAKO's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for XAKO's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Elvalhalcor Hellenic Copper and Aluminium Industry to get a more holistic view of the small-cap by looking at:

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

2. Valuation: What is XAKO 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 XAKO 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.

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