Is ENCE Energía y Celulosa, S.A.'s (BME:ENC) Balance Sheet Strong Enough To Weather A Storm?
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
While small-cap stocks, such as ENCE Energía y Celulosa, S.A. (BME:ENC) with its market cap of €1.1b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis 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, potential investors would need to take a closer look, and I suggest you dig deeper yourself into ENC here.
Does ENC Produce Much Cash Relative To Its Debt?
ENC has built up its total debt levels in the last twelve months, from €611m to €673m , which includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at €273m to keep the business going. Additionally, ENC has generated cash from operations of €243m in the last twelve months, resulting in an operating cash to total debt ratio of 36%, meaning that ENC’s operating cash is sufficient to cover its debt.
Does ENC’s liquid assets cover its short-term commitments?
Looking at ENC’s €311m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.44x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Forestry companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is ENC’s debt level acceptable?
With debt reaching 97% of equity, ENC 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. 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 ENC's case, the ratio of 9.3x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving ENC ample headroom to grow its debt facilities.
Next Steps:
ENC’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 ENC'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 ENC has company-specific issues impacting its capital structure decisions. You should continue to research ENCE Energía y Celulosa to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for ENC’s future growth? Take a look at our free research report of analyst consensus for ENC’s outlook.
Valuation: What is ENC 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 ENC 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 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.
