What does Rawlplug S.A.'s (WSE:RWL) Balance Sheet Tell Us About Its Future?

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Investors are always looking for growth in small-cap stocks like Rawlplug S.A. (WSE:RWL), with a market cap of zł281m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company's financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I recommend you dig deeper yourself into RWL here.

Does RWL produce enough cash relative to debt?

Over the past year, RWL has ramped up its debt from zł274m to zł309m – this includes long-term debt. With this growth in debt, RWL currently has zł38m remaining in cash and short-term investments for investing into the business. On top of this, RWL has produced zł50m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 16%, meaning that RWL’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In RWL’s case, it is able to generate 0.16x cash from its debt capital.

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

With current liabilities at zł360m, the company has been able to meet these obligations given the level of current assets of zł510m, with a current ratio of 1.42x. Generally, for Machinery companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Can RWL service its debt comfortably?

RWL is a relatively highly levered company with a debt-to-equity of 68%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In RWL's case, the ratio of 10.42x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as RWL’s high interest coverage is seen as responsible and safe practice.

Next Steps:

RWL’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. 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 RWL has been performing in the past. I recommend you continue to research Rawlplug to get a better picture of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for RWL’s future growth? Take a look at our free research report of analyst consensus for RWL’s outlook.
2. Valuation: What is RWL 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 RWL 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. On rare occasion, data errors may occur. Thank you for reading.