Is Seri Industrial S.p.A.'s (BIT:SERI) Balance Sheet A Threat To Its Future?
Seri Industrial S.p.A. (BIT:SERI) is a small-cap stock with a market capitalization of €81m. 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? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to 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. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into SERI here.
SERI’s Debt (And Cash Flows)
SERI has built up its total debt levels in the last twelve months, from €33m to €68m , which includes long-term debt. With this increase in debt, SERI currently has €16m remaining in cash and short-term investments to keep the business going. Moreover, SERI has generated cash from operations of €12m over the same time period, resulting in an operating cash to total debt ratio of 18%, indicating that SERI’s current level of operating cash is not high enough to cover debt.
Can SERI meet its short-term obligations with the cash in hand?
Looking at SERI’s €83m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.36x. The current ratio is calculated by dividing current assets by current liabilities. For Renewable Energy companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Does SERI face the risk of succumbing to its debt-load?
SERI is a relatively highly levered company with a debt-to-equity of 44%. 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 SERI 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 SERI's, case, the ratio of 0.14x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as SERI’s low interest coverage already puts the company at higher risk of default.
Next Steps:
Although SERI’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. Since there is also no concerns around SERI's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure SERI has company-specific issues impacting its capital structure decisions. You should continue to research Seri Industrial to get a better picture of the small-cap by looking at:
Historical Performance: What has SERI's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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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