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ENEA S.A. (WSE:ENA) is a small-cap stock with a market capitalization of zł4.8b. 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? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into ENA here.
How much cash does ENA generate through its operations?
ENA’s debt levels surged from zł6.9b to zł8.0b over the last 12 months – this includes long-term debt. With this rise in debt, ENA’s cash and short-term investments stands at zł3.5b , ready to deploy into the business. On top of this, ENA has generated cash from operations of zł3.2b during the same period of time, leading to an operating cash to total debt ratio of 40%, indicating that ENA’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 ENA’s case, it is able to generate 0.4x cash from its debt capital.
Does ENA’s liquid assets cover its short-term commitments?
At the current liabilities level of zł4.5b, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.55x. Usually, for Electric Utilities companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can ENA service its debt comfortably?
With a debt-to-equity ratio of 53%, ENA can be considered as an above-average leveraged company. 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 ENA’s case, the ratio of 5.57x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving ENA ample headroom to grow its debt facilities.
Although ENA’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 ENA’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure ENA has company-specific issues impacting its capital structure decisions. You should continue to research ENEA to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ENA’s future growth? Take a look at our free research report of analyst consensus for ENA’s outlook.
- Valuation: What is ENA 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 ENA 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.