Rocca Spólka Akcyjna (WSE:RCA) is a small-cap stock with a market capitalization of zł5.17m. 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? Evaluating financial health as part of your investment thesis is crucial, 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 recommend you dig deeper yourself into RCA here.
How much cash does RCA generate through its operations?
RCA has built up its total debt levels in the last twelve months, from zł608.67k to zł0 , which is made up of current and long term debt. With this growth in debt, RCA’s cash and short-term investments stands at zł206.49k , ready to deploy into the business. Moreover, RCA has generated zł265.66k in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 40.36%, meaning that RCA’s operating cash is sufficient to cover its 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 0.4x cash from its debt capital.
Does RCA’s liquid assets cover its short-term commitments?
Looking at RCA’s most recent zł444.60k liabilities, it appears that the company has been able to meet these commitments with a current assets level of zł512.43k, leading to a 1.15x current account ratio. For Basic Materials companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is RCA’s debt level acceptable?RCA is a relatively highly levered company with a debt-to-equity of 47.17%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
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. Keep in mind I haven’t considered other factors such as how RCA has been performing in the past. I suggest 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.