Polytec Holding AG (VIE:PYT) is a small-cap stock with a market capitalization of €204m. 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 crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, these checks don’t give you a full picture, so I suggest you dig deeper yourself into PYT here.
Does PYT Produce Much Cash Relative To Its Debt?
Over the past year, PYT has ramped up its debt from €140m to €175m , which accounts for long term debt. With this growth in debt, PYT currently has €74m remaining in cash and short-term investments to keep the business going. On top of this, PYT has generated €31m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 18%, indicating that PYT’s current level of operating cash is not high enough to cover debt.
Does PYT’s liquid assets cover its short-term commitments?
With current liabilities at €155m, it appears that the company has been able to meet these commitments with a current assets level of €280m, leading to a 1.81x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Auto Components companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is PYT’s debt level acceptable?
With debt reaching 74% of equity, PYT may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if PYT’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For PYT, the ratio of 11.83x 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.
Although PYT’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure PYT has company-specific issues impacting its capital structure decisions. You should continue to research Polytec Holding to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PYT’s future growth? Take a look at our free research report of analyst consensus for PYT’s outlook.
- Valuation: What is PYT worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether PYT is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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