What Investors Should Know About Arcadis NV's (AMS:ARCAD) Financial Strength

Arcadis NV (AMS:ARCAD) is a small-cap stock with a market capitalization of €985m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I suggest you dig deeper yourself into ARCAD here.

How much cash does ARCAD generate through its operations?

ARCAD has shrunken its total debt levels in the last twelve months, from €800m to €718m , which includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at €241m for investing into the business. On top of this, ARCAD has produced cash from operations of €174m over the same time period, leading to an operating cash to total debt ratio of 24%, indicating that ARCAD’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ARCAD’s case, it is able to generate 0.24x cash from its debt capital.

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

At the current liabilities level of €1.2b, the company has been able to meet these obligations given the level of current assets of €1.5b, with a current ratio of 1.2x. Usually, for Construction companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

Can ARCAD service its debt comfortably?

ARCAD is a relatively highly levered company with a debt-to-equity of 71%. 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 ARCAD’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 ARCAD, the ratio of 8.61x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as ARCAD’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although ARCAD’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how ARCAD has been performing in the past. I recommend you continue to research Arcadis to get a better picture of the small-cap by looking at:

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