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Poltronic S.A. (WSE:PTN) is a small-cap stock with a market capitalization of zł2.7m. 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. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into PTN here.
Does PTN Produce Much Cash Relative To Its Debt?
PTN has shrunk its total debt levels in the last twelve months, from zł3.0m to zł2.4m – this includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at zł551k , ready to be used for running the business. Moreover, PTN has produced zł575k in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 23%, signalling that PTN’s operating cash is sufficient to cover its debt.
Can PTN meet its short-term obligations with the cash in hand?
With current liabilities at zł4.4m, the company has been able to meet these commitments with a current assets level of zł7.8m, leading to a 1.76x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Trade Distributors 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 PTN’s debt level acceptable?
PTN is a relatively highly levered company with a debt-to-equity of 48%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether PTN 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 PTN's, case, the ratio of 4.76x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as PTN’s high interest coverage is seen as responsible and safe practice.
Although PTN’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. 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 PTN's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Poltronic to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for PTN’s future growth? Take a look at our free research report of analyst consensus for PTN’s outlook.
Valuation: What is PTN 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 PTN 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.