Grupa Azoty SA. (WSE:ATT) is a small-cap stock with a market capitalization of ZŁ5.50B. 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? Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into ATT here.
Does ATT generate an acceptable amount of cash through operations?
ATT’s debt levels surged from ZŁ1.24B to ZŁ1.49B over the last 12 months , which is made up of current and long term debt. With this rise in debt, the current cash and short-term investment levels stands at ZŁ1.23B for investing into the business. On top of this, ATT has generated cash from operations of ZŁ1.12B in the last twelve months, leading to an operating cash to total debt ratio of 74.81%, signalling that ATT’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ATT’s case, it is able to generate 0.75x cash from its debt capital.
Can ATT pay its short-term liabilities?
With current liabilities at ZŁ1.85B, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.84x. Generally, for Chemicals companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does ATT face the risk of succumbing to its debt-load?
With debt at 21.70% of equity, ATT may be thought of as appropriately levered. This range is considered safe as ATT is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if ATT’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 ATT, the ratio of 29.83x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
ATT has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for ATT’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Grupa Azoty to get a better picture of the stock by looking at: