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While small-cap stocks, such as Surteco Group SE (ETR:SUR) with its market cap of €381m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is just a partial view of the stock, and I recommend you dig deeper yourself into SUR here.

SUR’s Debt (And Cash Flows)

SUR's debt level has been constant at around €327m over the previous year including long-term debt. At this constant level of debt, SUR's cash and short-term investments stands at €122m , ready to be used for running the business. On top of this, SUR has produced €71m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 22%, indicating that SUR’s operating cash is sufficient to cover its debt.

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

Looking at SUR’s €191m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of €361m, leading to a 1.89x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Consumer Durables companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

Is SUR’s debt level acceptable?

With a debt-to-equity ratio of 90%, SUR 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 test if SUR’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 SUR, the ratio of 6.82x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving SUR ample headroom to grow its debt facilities.

Next Steps:

SUR’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 SUR's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how SUR has been performing in the past. I suggest you continue to research Surteco Group to get a better picture of the small-cap by looking at:

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

2. Valuation: What is SUR 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 SUR 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.