While small-cap stocks, such as Recticel NV/SA (EBR:REC) with its market cap of €350m, 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 vital, 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, since I only look at basic financial figures, I recommend you dig deeper yourself into REC here.
How much cash does REC generate through its operations?
REC’s debt levels have fallen from €167m to €146m over the last 12 months – this includes long-term debt. With this debt repayment, REC’s cash and short-term investments stands at €41m for investing into the business. Moreover, REC has produced cash from operations of €81m during the same period of time, resulting in an operating cash to total debt ratio of 55%, indicating that REC’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In REC’s case, it is able to generate 0.55x cash from its debt capital.
Can REC meet its short-term obligations with the cash in hand?
Looking at REC’s €401m in current liabilities, the company may not have an easy time meeting these commitments with a current assets level of €367m, leading to a current ratio of 0.92x.
Can REC service its debt comfortably?
REC is a relatively highly levered company with a debt-to-equity of 57%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether REC 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 REC’s, case, the ratio of 11.01x 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.
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REC’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. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for REC’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Recticel/SA to get a more holistic view of the stock by looking at: