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Trans Polonia S.A. (WSE:TRN) is a small-cap stock with a market capitalization of zł22m. 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? Evaluating financial health as part of your investment thesis is essential, 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, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into TRN here.
TRN’s Debt (And Cash Flows)
TRN has sustained its debt level by about zł94m over the last 12 months including long-term debt. At this stable level of debt, TRN currently has zł49m remaining in cash and short-term investments , ready to be used for running the business. Additionally, TRN has generated cash from operations of zł15m during the same period of time, leading to an operating cash to total debt ratio of 16%, meaning that TRN’s operating cash is less than its debt.
Does TRN’s liquid assets cover its short-term commitments?
Looking at TRN’s zł52m in current liabilities, the company has been able to meet these obligations given the level of current assets of zł107m, with a current ratio of 2.08x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Transportation 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.
Does TRN face the risk of succumbing to its debt-load?
With debt reaching 84% of equity, TRN may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether TRN 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 TRN's, case, the ratio of 2.94x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
TRN’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. Keep in mind I haven't considered other factors such as how TRN has been performing in the past. You should continue to research Trans Polonia to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TRN’s future growth? Take a look at our free research report of analyst consensus for TRN’s outlook.
- Valuation: What is TRN 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 TRN 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.