What Does Recticel NV/SA's (EBR:REC) Balance Sheet Tell Us About It?
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Investors are always looking for growth in small-cap stocks like Recticel NV/SA (EBR:REC), with a market cap of €481m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is 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. Nevertheless, this is not a comprehensive overview, so I suggest you dig deeper yourself into REC here.
Does REC Produce Much Cash Relative To Its Debt?
REC has shrunk its total debt levels in the last twelve months, from €145m to €123m – this includes long-term debt. With this reduction in debt, REC's cash and short-term investments stands at €38m , ready to be used for running the business. Moreover, REC has produced €57m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 47%, indicating that REC’s debt is appropriately covered by operating cash.
Can REC meet its short-term obligations with the cash in hand?
With current liabilities at €340m, it seems that the business has been able to meet these obligations given the level of current assets of €343m, with a current ratio of 1.01x. The current ratio is calculated by dividing current assets by current liabilities. For Chemicals companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does REC face the risk of succumbing to its debt-load?
REC is a relatively highly levered company with a debt-to-equity of 46%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 REC's case, the ratio of 10.06x 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:
REC’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 REC'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 REC has company-specific issues impacting its capital structure decisions. I recommend you continue to research Recticel/SA to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for REC’s future growth? Take a look at our free research report of analyst consensus for REC’s outlook.
Valuation: What is REC 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 REC 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.
