Is Recticel NV/SA (EBR:REC) A Financially Sound Company?

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

Investors are always looking for growth in small-cap stocks like Recticel NV/SA (EBR:REC), with a market cap of €414m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to 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. However, these checks don’t give you a full picture, so I’d encourage you to dig deeper yourself into REC here.

REC’s Debt (And Cash Flows)

REC’s debt levels have fallen from €145m to €125m over the last 12 months , which also accounts for long term debt. With this debt payback, REC’s cash and short-term investments stands at €40m , ready to be used for running the business. Moreover, REC has produced cash from operations of €57m during the same period of time, leading to an operating cash to total debt ratio of 46%, meaning that REC’s debt is appropriately covered by operating cash.

Does REC’s liquid assets cover its short-term commitments?

At the current liabilities level of €341m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.01x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Chemicals companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

ENXTBR:REC Historical Debt, June 4th 2019
ENXTBR:REC Historical Debt, June 4th 2019

Can REC service its debt comfortably?

With debt reaching 47% of equity, REC may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. 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 19.46x suggests that interest is comfortably covered, which means that lenders may be willing 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. Keep in mind I haven’t considered other factors such as how REC has been performing in the past. You should continue to research Recticel/SA to get a better picture of the small-cap by looking at:

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

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.