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Compagnie Plastic Omnium SA (EPA:POM): Time For A Financial Health Check

Simply Wall St

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Compagnie Plastic Omnium SA (EPA:POM) is a small-cap stock with a market capitalization of €3.1b. 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. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is just a partial view of the stock, and I suggest you dig deeper yourself into POM here.

POM’s Debt (And Cash Flows)

Over the past year, POM has maintained its debt levels at around €1.8b including long-term debt. At this current level of debt, POM currently has €980m remaining in cash and short-term investments , ready to be used for running the business. Moreover, POM has produced €795m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 45%, indicating that POM’s debt is appropriately covered by operating cash.

Can POM pay its short-term liabilities?

Looking at POM’s €2.7b in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of €2.9b, with a current ratio of 1.07x. The current ratio is calculated by dividing current assets by current liabilities. For Auto Components companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

ENXTPA:POM Historical Debt, July 18th 2019

Can POM service its debt comfortably?

With a debt-to-equity ratio of 81%, POM can be considered as an above-average leveraged company. 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 POM’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 POM, the ratio of 8.69x suggests that interest is appropriately 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:

POM’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. Since there is also no concerns around POM's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for POM's financial health. Other important fundamentals need to be considered alongside. You should continue to research Compagnie Plastic Omnium to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for POM’s future growth? Take a look at our free research report of analyst consensus for POM’s outlook.
  2. Valuation: What is POM 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 POM is currently mispriced by the market.
  3. 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 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.