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Public Power Corporation SA. (ATSE:PPC) is a small-cap stock with a market capitalization of €531.28M. 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? Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about 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, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into PPC here.
How does PPC’s operating cash flow stack up against its debt?
Over the past year, PPC has reduced its debt from €4.61B to €4.27B , which comprises of short- and long-term debt. With this debt repayment, the current cash and short-term investment levels stands at €251.60M for investing into the business. Moreover, PPC has generated €176.81M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 4.14%, indicating that PPC’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In PPC’s case, it is able to generate 0.041x cash from its debt capital.
Can PPC meet its short-term obligations with the cash in hand?
At the current liabilities level of €3.38B liabilities, it appears that the company has been able to meet these commitments with a current assets level of €3.60B, leading to a 1.07x current account ratio. Generally, for Electric Utilities companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does PPC face the risk of succumbing to its debt-load?
With debt reaching 76.09% of equity, PPC may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether PPC is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In PPC’s, case, the ratio of 2.65x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.