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While small-cap stocks, such as Arctic Paper S.A. (WSE:ATC) with its market cap of zł177m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is 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 just a partial view of the stock, and I recommend you dig deeper yourself into ATC here.
ATC’s Debt (And Cash Flows)
ATC has built up its total debt levels in the last twelve months, from zł464m to zł489m , which includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at zł231m to keep the business going. Moreover, ATC has produced zł207m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 42%, meaning that ATC’s current level of operating cash is high enough to cover debt.
Can ATC meet its short-term obligations with the cash in hand?
At the current liabilities level of zł870m, the company has been able to meet these commitments with a current assets level of zł1.1b, leading to a 1.25x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Forestry companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is ATC’s debt level acceptable?
With debt reaching 57% of equity, ATC may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. 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 ATC's case, the ratio of 6.7x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as ATC’s high interest coverage is seen as responsible and safe practice.
Next Steps:
ATC’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 ATC's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for ATC's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Arctic Paper to get a better picture of the small-cap by looking at: