What Does Interpump Group S.p.A.’s (BIT:IP) Balance Sheet Tell Us About It?

Investors are always looking for growth in small-cap stocks like Interpump Group S.p.A. (BIT:IP), with a market cap of €3.4b. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company’s financial health becomes essential, 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. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into IP here.

Does IP Produce Much Cash Relative To Its Debt?

IP’s debt level has been constant at around €405m over the previous year including long-term debt. At this stable level of debt, IP currently has €118m remaining in cash and short-term investments to keep the business going. Additionally, IP has generated cash from operations of €149m over the same time period, leading to an operating cash to total debt ratio of 37%, signalling that IP’s operating cash is sufficient to cover its debt.

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

With current liabilities at €446m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.77x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Machinery companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

BIT:IP Historical Debt, April 16th 2019
BIT:IP Historical Debt, April 16th 2019

Can IP service its debt comfortably?

IP is a relatively highly levered company with a debt-to-equity of 47%. 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 check to see whether IP 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 IP’s, case, the ratio of 77.12x 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.

Next Steps:

Although IP’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. Since there is also no concerns around IP’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 IP has been performing in the past. I suggest you continue to research Interpump Group to get a better picture of the small-cap by looking at:

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