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Robertet SA (EPA:RBT) is a small-cap stock with a market capitalization of €1.2b. 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. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into RBT here.
How does RBT’s operating cash flow stack up against its debt?
RBT’s debt levels have fallen from €139m to €126m over the last 12 months – this includes long-term debt. With this debt repayment, RBT currently has €92m remaining in cash and short-term investments , ready to deploy into the business. Moreover, RBT has generated €41m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 33%, indicating that RBT’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 RBT’s case, it is able to generate 0.33x cash from its debt capital.
Can RBT pay its short-term liabilities?
At the current liabilities level of €147m, it appears that the company has been able to meet these obligations given the level of current assets of €421m, with a current ratio of 2.87x. Generally, for Chemicals companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is RBT’s debt level acceptable?
RBT’s level of debt is appropriate relative to its total equity, at 33%. This range is considered safe as RBT is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether RBT 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 RBT’s, case, the ratio of 72.68x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as RBT’s high interest coverage is seen as responsible and safe practice.