Asseco Poland SA. (WSE:ACP) is a small-cap stock with a market capitalization of ZŁ3.48B. 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? Companies operating in the Software industry, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into ACP here.
How does ACP’s operating cash flow stack up against its debt?
ACP has built up its total debt levels in the last twelve months, from ZŁ1.38B to ZŁ1.52B , which is made up of current and long term debt. With this rise in debt, the current cash and short-term investment levels stands at ZŁ1.60B for investing into the business. On top of this, ACP has produced ZŁ691.40M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 45.56%, indicating that ACP’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ACP’s case, it is able to generate 0.46x cash from its debt capital.
Can ACP pay its short-term liabilities?
Looking at ACP’s most recent ZŁ2.60B liabilities, it seems that the business has been able to meet these commitments with a current assets level of ZŁ4.39B, leading to a 1.69x current account ratio. Generally, for Software companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does ACP face the risk of succumbing to its debt-load?
ACP’s level of debt is appropriate relative to its total equity, at 13.99%. ACP is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether ACP 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 ACP’s, case, the ratio of 14.2x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving ACP ample headroom to grow its debt facilities.Next Steps:
ACP’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for ACP’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Asseco Poland to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ACP’s future growth? Take a look at our free research report of analyst consensus for ACP’s outlook.
- Valuation: What is ACP 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 ACP 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.