Investors are always looking for growth in small-cap stocks like Rocca Spólka Akcyjna (WSE:RCA), with a market cap of zł4.86m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, 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. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into RCA here.
How much cash does RCA generate through its operations?
RCA has sustained its debt level by about zł683.01k over the last 12 months made up of current and long term debt. At this stable level of debt, RCA currently has zł376.89k remaining in cash and short-term investments for investing into the business. Additionally, RCA has generated cash from operations of zł218.60k in the last twelve months, leading to an operating cash to total debt ratio of 32.01%, indicating that RCA’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In RCA’s case, it is able to generate 0.32x cash from its debt capital.
Does RCA’s liquid assets cover its short-term commitments?
With current liabilities at zł667.12k, it seems that the business has been able to meet these obligations given the level of current assets of zł868.06k, with a current ratio of 1.3x. Generally, for Basic Materials companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does RCA face the risk of succumbing to its debt-load?With debt reaching 48.81% of equity, RCA may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether RCA 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 RCA’s, case, the ratio of 4.33x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving RCA ample headroom to grow its debt facilities.
RCA’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. I admit this is a fairly basic analysis for RCA’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Rocca Spólka Akcyjna to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RCA’s future growth? Take a look at our free research report of analyst consensus for RCA’s outlook.
- Valuation: What is RCA 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 RCA is currently mispriced by the market.
- 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.