Investors are always looking for growth in small-cap stocks like Rocca Spólka Akcyjna (WSE:RCA), with a market cap of ZŁ5.17M. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis 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. However, I know these factors are very high-level, so I recommend you dig deeper yourself into RCA here.
How does RCA’s operating cash flow stack up against its debt?
RCA has built up its total debt levels in the last twelve months, from ZŁ608.67K to ZŁ658.23K , which comprises of short- and long-term debt. With this rise in debt, RCA’s cash and short-term investments stands at ZŁ206.49K , ready to deploy into the business. Additionally, RCA has generated ZŁ265.66K in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 40.36%, signalling that RCA’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In RCA’s case, it is able to generate 0.4x cash from its debt capital.
Can RCA meet its short-term obligations with the cash in hand?
Looking at RCA’s most recent ZŁ444.60K liabilities, it appears that the company has been able to meet these obligations given the level of current assets of ZŁ512.43K, with a current ratio of 1.15x. Usually, for Basic Materials companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does RCA face the risk of succumbing to its debt-load?With debt reaching 47.17% 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. 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 RCA’s case, the ratio of 2.78x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as RCA’s low interest coverage already puts the company at higher risk of default.
Although RCA’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 RCA has been performing in the past. I recommend you continue to research Rocca Spólka Akcyjna to get a better picture of the small-cap by looking at:
- Historical Performance: What has RCA’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.
- 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.