Investors are always looking for growth in small-cap stocks like Rapala VMC Corporation (HEL:RAP1V), with a market cap of €126m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, 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, I know these factors are very high-level, so I suggest you dig deeper yourself into RAP1V here.
How much cash does RAP1V generate through its operations?
RAP1V’s debt levels have fallen from €96m to €78m over the last 12 months , which is made up of current and long term debt. With this debt repayment, RAP1V currently has €12m remaining in cash and short-term investments , ready to deploy into the business. Additionally, RAP1V has produced cash from operations of €17m during the same period of time, resulting in an operating cash to total debt ratio of 22%, signalling that RAP1V’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In RAP1V’s case, it is able to generate 0.22x cash from its debt capital.
Does RAP1V’s liquid assets cover its short-term commitments?
Looking at RAP1V’s most recent €113m liabilities, it seems that the business has been able to meet these commitments with a current assets level of €175m, leading to a 1.55x current account ratio. Usually, for Leisure companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does RAP1V face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 52%, RAP1V can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if RAP1V’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 RAP1V, the ratio of 15x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving RAP1V ample headroom to grow its debt facilities.
At its current level of cash flow coverage, RAP1V has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for RAP1V’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Rapala VMC to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RAP1V’s future growth? Take a look at our free research report of analyst consensus for RAP1V’s outlook.
- Valuation: What is RAP1V 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 RAP1V 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.
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 firstname.lastname@example.org.