While small-cap stocks, such as Polytec Holding AG (VIE:PYT) with its market cap of €194m, 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 crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I recommend you dig deeper yourself into PYT here.
How much cash does PYT generate through its operations?
Over the past year, PYT has reduced its debt from €143m to €133m , which also accounts for long term debt. With this debt repayment, PYT currently has €29m remaining in cash and short-term investments for investing into the business. Moreover, PYT has produced cash from operations of €34m over the same time period, leading to an operating cash to total debt ratio of 26%, meaning that PYT’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In PYT’s case, it is able to generate 0.26x cash from its debt capital.
Does PYT’s liquid assets cover its short-term commitments?
With current liabilities at €157m, the company has been able to meet these obligations given the level of current assets of €240m, with a current ratio of 1.53x. Usually, for Auto Components companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can PYT service its debt comfortably?
With a debt-to-equity ratio of 58%, PYT can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 after interest and tax at least three times its net interest payments is considered financially sound. In PYT’s case, the ratio of 15.57x 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.
PYT’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 PYT’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 PYT has company-specific issues impacting its capital structure decisions. I recommend you continue to research Polytec Holding to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for PYT’s future growth? Take a look at our free research report of analyst consensus for PYT’s outlook.
- Valuation: What is PYT 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 PYT 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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