While small-cap stocks, such as A.P.N. Promise S.A. (WSE:PRO) with its market cap of zł29m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. However, these checks don’t give you a full picture, so I suggest you dig deeper yourself into PRO here.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
PRO’s Debt (And Cash Flows)
PRO has built up its total debt levels in the last twelve months, from zł23m to zł37m – this includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at zł44m to keep the business going. On top of this, PRO has produced zł26m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 70%, indicating that PRO’s debt is appropriately covered by operating cash.
Can PRO meet its short-term obligations with the cash in hand?
At the current liabilities level of zł219m, the company has been able to meet these obligations given the level of current assets of zł228m, with a current ratio of 1.04x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for IT 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.
Is PRO’s debt level acceptable?
With total debt exceeding equity, PRO is considered a highly levered company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In PRO’s case, the ratio of 27.65x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving PRO ample headroom to grow its debt facilities.
Although PRO’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. Since there is also no concerns around PRO’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how PRO has been performing in the past. I suggest you continue to research A.P.N. Promise to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PRO’s future growth? Take a look at our free research report of analyst consensus for PRO’s outlook.
- Valuation: What is PRO 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 PRO 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.