Investors are always looking for growth in small-cap stocks like Zimplats Holdings Limited (ASX:ZIM), with a market cap of AUD A$452.08M. However, an important fact which most ignore is: how financially healthy is the company? Why is it important? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. View our latest analysis for Zimplats Holdings

Does ZIM generate enough cash through operations?

Unxpected adverse events, such as natural disasters and wars, can be a true test of a company’s capacity to meet its obligations. These adverse events bring devastation and yet does not absolve the company from its debt. We can test the impact of these adverse events by looking at whether cash from its current operations can pay back its current debt obligations. In the case of ZIM, operating cash flow turned out to be 0.51x its debt level over the past twelve months. A ratio of over 0.5x is a positive sign and shows that ZIM is generating more than enough cash from its core business, which should increase its potential to pay back near-term debt.

Does ZIM’s liquid assets cover its short-term commitments?

What about its commitments to other stakeholders such as payments to suppliers and employees? In times of adverse events, ZIM may need to liquidate its short-term assets to pay these immediate obligations. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that ZIM does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.

Can ZIM service its debt comfortably?

Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. For ZIM, the debt-to-equity ratio is 10.98%, which means its debt level does not pose a threat to its operations right now. While debt-to-equity ratio has several factors at play, an easier way to check whether ZIM’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings at least three times its interest payments is considered financially sound. ZIM’s profits amply covers interest at 13.73 times, which is seen as relatively safe. This means lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

Are you a shareholder? ZIM’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Going forward, its financial position may be different. You should always be keeping on top of market expectations for ZIM’s future growth on our free analysis platform.

Are you a potential investor? ZIM’s high cash coverage and low levels of debt indicate its ability to use its borrowings efficiently in order to produce a healthy cash flow. In addition, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. To gain more conviction in the stock, you need to also analyse the company’s track record. As a following step, you should take a look at ZIM’s past performance analysis on our free platform to conclude on ZIM’s financial health.

To help readers see pass 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.