Is Somec S.p.A.’s (BIT:SOM) Balance Sheet A Threat To Its Future?
Investors are always looking for growth in small-cap stocks like Somec S.p.A. (BIT:SOM), with a market cap of €111m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into SOM here.
How does SOM’s operating cash flow stack up against its debt?
Over the past year, SOM has reduced its debt from €41m to €35m , which also accounts for long term debt. With this debt repayment, SOM’s cash and short-term investments stands at €28m , ready to deploy into the business. Additionally, SOM has generated cash from operations of €8.6m over the same time period, resulting in an operating cash to total debt ratio of 24%, signalling that SOM’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SOM’s case, it is able to generate 0.24x cash from its debt capital.
Can SOM pay its short-term liabilities?
Looking at SOM’s €110m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of €122m, leading to a 1.11x current account ratio. Usually, for Building companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does SOM face the risk of succumbing to its debt-load?
SOM is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if SOM’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 SOM, the ratio of 12.73x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving SOM ample headroom to grow its debt facilities.
Next Steps:
Although SOM’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 SOM’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for SOM’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Somec to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for SOM’s future growth? Take a look at our free research report of analyst consensus for SOM’s outlook.
Valuation: What is SOM 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 SOM 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
