Is Scapa Group plc's (LON:SCPA) Balance Sheet Strong Enough To Weather A Storm?

Investors are always looking for growth in small-cap stocks like Scapa Group plc (LON:SCPA), with a market cap of UK£657.68m. 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, as mismanagement of capital can lead to 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. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into SCPA here.

How does SCPA’s operating cash flow stack up against its debt?

SCPA's debt levels have fallen from UK£28.20m to UK£22.50m over the last 12 months , which is made up of current and long term debt. With this reduction in debt, the current cash and short-term investment levels stands at UK£18.10m for investing into the business. Moreover, SCPA has produced cash from operations of UK£27.00m over the same time period, leading to an operating cash to total debt ratio of 120.00%, meaning that SCPA’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 SCPA’s case, it is able to generate 1.2x cash from its debt capital.

Can SCPA pay its short-term liabilities?

Looking at SCPA’s most recent UK£66.00m liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.7x. Generally, for Chemicals companies, this is a reasonable ratio as there's enough of a cash buffer without holding too capital in low return investments.

Can SCPA service its debt comfortably?

SCPA’s level of debt is appropriate relative to its total equity, at 18.92%. This range is considered safe as SCPA is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether SCPA 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 SCPA's, case, the ratio of 25.42x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as SCPA’s high interest coverage is seen as responsible and safe practice.

Next Steps:

SCPA’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I'm sure SCPA has company-specific issues impacting its capital structure decisions. You should continue to research Scapa Group to get a more holistic view of the stock by looking at:

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

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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.