Structure of the balance sheet
The balance sheet is a two-column statement that always balances: Assets = Liabilities + Shareholders' equity. Assets describe what the company owns or controls; liabilities describe how those assets were financed (debt) or by whom (shareholders).
In practice, an investor does not need to read every line of the balance sheet. There are 5 key indicators to calculate quickly from it in order to assess the financial strength of a small cap.
1. Net debt and the net debt/EBITDA ratio
Net debt is the most relevant measure of leverage for an investor. It subtracts available cash from financial debt — because cash can immediately repay debt.
The net debt/EBITDA ratio is the most heavily weighted in the Financial strength pillar of the screener (10 pts out of 25). Here are the thresholds:
| Net debt / EBITDA | Interpretation | Screener score |
|---|---|---|
| < 0 (negative) | Net cash — the company has more cash than debt | 10 / 10 pts |
| 0 — 1x | Very lightly indebted — excellent strength | 8 / 10 pts |
| 1 — 2x | Moderate leverage — healthy for a cyclical small cap | 5 / 10 pts |
| 2 — 3x | Significant leverage — to watch | 2 / 10 pts |
| > 3x | High leverage — material financial risk | 0 / 10 pts |
Beware of short-term debt: in the net debt calculation, include only short-term financial debt (borrowings, credit lines) — not trade payables, which are part of working capital. In most financial databases, use shortTermDebt and longTermDebt, never totalDebt, which aggregates debt of very different kinds.
2. The Current Ratio — short-term liquidity
The current ratio measures a company's ability to meet its short-term obligations with its short-term assets. It is the first indicator of liquidity risk.
| Current Ratio | Interpretation | Screener score |
|---|---|---|
| > 2.0 | Excellent liquidity — very comfortable | 3 / 3 pts |
| 1.5 — 2.0 | Good liquidity — healthy | 2 / 3 pts |
| 1.0 — 1.5 | Adequate liquidity — to watch | 1 / 3 pts |
| < 1.0 | Liquidity risk — short-term assets insufficient to cover short-term debt | 0 / 3 pts |
On small caps: the current ratio matters especially because smaller companies have more limited access to capital markets than large companies. In a cash squeeze, a large cap can issue bonds or shares quickly — a small cap with no listed bonds cannot. A current ratio below 1 on a small cap is a serious alarm signal.
3. Goodwill — intangible-asset risk
Goodwill appears on the asset side of the balance sheet when a company acquires another at a price above its net book value. It represents the value paid for intangible elements: brand, customer base, market share, expected synergies.
The danger: if the acquisitions did not create the expected value, the goodwill must be impaired — a charge that can be massive and that directly hits shareholders' equity and net income.
| Goodwill / Total assets | Interpretation | Risk |
|---|---|---|
| < 5% | Negligible — company makes few acquisitions | Low |
| 5 — 15% | Moderate — a few acquisitions | Acceptable |
| 15 — 30% | Significant — substantial external growth | To watch |
| > 30% | High — strong dependence on past acquisitions | High risk |
How to spot goodwill at risk
High goodwill is not automatically a problem — it may reflect successful, value-creating acquisitions. But cross-check it against two indicators:
- ROCE of acquired subsidiaries: if the group's overall ROCE has been declining since the acquisitions, it is a sign that the prices paid were too high.
- Annual impairment test: read the notes to the annual report — every year, the company must test whether the goodwill is impaired. Cautious comments from the auditor on this point deserve attention.
4. Working capital — efficiency of the operating cycle
Working capital (the working capital requirement) measures the cash need generated by the operating cycle — the lag between paying suppliers and collecting from customers.
Positive working capital means the company is financing its operating cycle — it needs cash. Negative working capital (some retailers, prepaid SaaS) is favourable: customers pay before the company has to pay its suppliers.
| Working capital in days | Profile | Interpretation |
|---|---|---|
| < 0 days | Negative working capital | Favourable model — customers pay before suppliers |
| 0 — 30 days | Very efficient | Short cycle, good working-capital control |
| 30 — 60 days | Normal | Standard for industry / services |
| 60 — 90 days | High | Heavy inventory or receivables — watch the trend |
| > 90 days | Very high | Risk of a cash squeeze if growth accelerates |
Working capital and growth: a fast-growing company mechanically sees its working capital rise — it sells more so has more receivables, and builds more inventory. That is why a growing company can have negative FCF even with excellent EBITDA. Working capital in days lets you tell a structural deterioration apart from a mere growth effect.
5. Shareholders' equity — value for the shareholder
Shareholders' equity represents the company's net book value for its shareholders: what would be left if all assets were sold and all debts repaid. How it evolves over time is a key indicator of value creation (or destruction).
Three warning signs to watch:
- Negative equity: the company has accumulated so many losses that its debts exceed its assets. A rare but critical situation on small caps — ROE then becomes meaningless.
- Declining equity without large dividends or buybacks: the company is eroding its equity through recurring losses.
- Excessive dilution: repeated capital increases to cover operating losses dilute existing shareholders and signal an unsustainable model.
Calculator — Analyse a balance sheet in 2 minutes
The screener's Financial strength score: recap
The Financial strength pillar of Screener Small Caps combines balance sheet indicators into a score out of 25 points. Here is the exact weighting:
Net debt/EBITDA is deliberately the most heavily weighted criterion — it is the solvency risk that can lead to bankruptcy or massive dilution. On illiquid small caps, this risk is amplified by the difficulty of raising capital quickly under stress.
Balance sheet checklist in 5 questions
To analyse a small cap's balance sheet quickly before investing, ask yourself these five questions:
- Is net debt/EBITDA below 2x? If not, identify why, and whether it is structural or cyclical.
- Is the current ratio above 1.5? If not, the company may face short-term cash difficulties.
- Does goodwill exceed 20% of total assets? If so, read the notes on impairment tests.
- Is shareholders' equity positive and growing? A decline without large dividends or buybacks is an alarm signal.
- Is working capital in days improving or deteriorating? A continuous deterioration may indicate a loss of pricing power or lengthening customer payment terms.
The Fundamental analysis cluster — complete
You now have all the keys to analyse a small cap across every fundamental angle. Here is the full cluster:
To understand the market these analyses apply to, see the Euronext Growth guide. For quick definitions, the glossary covers all the screener's terms.