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

While small-cap stocks, such as Rawlplug SA (WSE:RWL) with its market cap of zł303m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is essential, 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, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into RWL here.

How much cash does RWL generate through its operations?

RWL has built up its total debt levels in the last twelve months, from zł283m to zł309m – this includes both the current and long-term debt. With this rise in debt, RWL's cash and short-term investments stands at zł39m , ready to deploy into the business. Moreover, RWL has generated cash from operations of zł34m during the same period of time, resulting in an operating cash to total debt ratio of 11%, indicating that RWL’s current level of operating cash is not high enough to cover 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 0.11x cash from its debt capital.

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

Looking at RWL’s most recent zł366m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of zł506m, with a current ratio of 1.38x. For Machinery companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Does RWL face the risk of succumbing to its debt-load?

With debt reaching 69% of equity, RWL may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether RWL 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 RWL's, case, the ratio of 10.16x 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:

RWL’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven't considered other factors such as how RWL has been performing in the past. You should continue to research Rawlplug to get a better picture of the stock 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. Historical Performance: What has RWL's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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.