Investors are always looking for growth in small-cap stocks like Recticel NV/SA (ENXTBR:REC), with a market cap of €554.30M. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into REC here.
Does REC generate an acceptable amount of cash through operations?
REC has sustained its debt level by about €145.10M over the last 12 months comprising of short- and long-term debt. At this current level of debt, REC’s cash and short-term investments stands at €57.80M for investing into the business. On top of this, REC has generated cash from operations of €75.60M in the last twelve months, leading to an operating cash to total debt ratio of 52.10%, meaning 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 0.52x cash from its debt capital.
Can REC pay its short-term liabilities?
With current liabilities at €306.20M, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.16x. For Chemicals companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is REC’s debt level acceptable?
REC is a relatively highly levered company with a debt-to-equity of 55.42%. 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 13.88x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as REC’s high interest coverage is seen as responsible and safe practice.
Next Steps:
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. Since there is also no concerns around REC’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for REC’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Recticel/SA to get a better picture of the small-cap by looking at: