Is PORR AG's (VIE:POS) Balance Sheet A Threat To Its Future?

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Investors are always looking for growth in small-cap stocks like PORR AG (VIE:POS), with a market cap of €541m. However, an important fact which most ignore is: how financially healthy is the business? 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 a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into POS here.

Does POS produce enough cash relative to debt?

POS has built up its total debt levels in the last twelve months, from €593m to €625m , which includes long-term debt. With this increase in debt, POS's cash and short-term investments stands at €288m , ready to deploy into the business. On top of this, POS has generated €166m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 27%, meaning that POS’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In POS’s case, it is able to generate 0.27x cash from its debt capital.

Can POS meet its short-term obligations with the cash in hand?

Looking at POS’s €2.0b in current liabilities, the company has been able to meet these obligations given the level of current assets of €2.2b, with a current ratio of 1.1x. Usually, for Construction companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Does POS face the risk of succumbing to its debt-load?

Since total debt levels have outpaced equities, POS is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses.

Next Steps:

POS’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 POS's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how POS has been performing in the past. You should continue to research PORR to get a better picture of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for POS’s future growth? Take a look at our free research report of analyst consensus for POS’s outlook.
2. Valuation: What is POS 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 POS is currently mispriced by the market.
3. 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.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.