Is AB Inter RAO Lietuva (WSE:IRL) A Financially Sound Company?
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Investors are always looking for growth in small-cap stocks like AB Inter RAO Lietuva (WSE:IRL), with a market cap of zł218m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into IRL here.
IRL’s Debt (And Cash Flows)
Over the past year, IRL has reduced its debt from €15m to €7.8m , which includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at €21m , ready to be used for running the business. Moreover, IRL has generated €30m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 387%, signalling that IRL’s debt is appropriately covered by operating cash.
Can IRL pay its short-term liabilities?
With current liabilities at €39m, the company has been able to meet these obligations given the level of current assets of €40m, with a current ratio of 1.02x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Electric Utilities companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is IRL’s debt level acceptable?
With debt reaching 45% of equity, IRL may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if IRL’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For IRL, the ratio of 40.92x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
IRL’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. I admit this is a fairly basic analysis for IRL's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research AB Inter RAO Lietuva to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for IRL’s future growth? Take a look at our free research report of analyst consensus for IRL’s outlook.
Valuation: What is IRL 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 IRL 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.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.
