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Energa SA (WSE:ENG) is a small-cap stock with a market capitalization of zł3.0b. 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, since poor capital management may bring about 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. Nevertheless, potential investors would need to take a closer look, and I recommend you dig deeper yourself into ENG here.
ENG’s Debt (And Cash Flows)
ENG's debt levels have fallen from zł7.7b to zł7.2b over the last 12 months – this includes long-term debt. With this debt repayment, ENG's cash and short-term investments stands at zł2.7b , ready to be used for running the business. On top of this, ENG has produced cash from operations of zł1.9b in the last twelve months, leading to an operating cash to total debt ratio of 26%, indicating that ENG’s current level of operating cash is high enough to cover debt.
Does ENG’s liquid assets cover its short-term commitments?
With current liabilities at zł2.8b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.93x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Electric Utilities companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does ENG face the risk of succumbing to its debt-load?
With debt reaching 69% of equity, ENG 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. We can check to see whether ENG 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 ENG's, case, the ratio of 3.55x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as ENG’s high interest coverage is seen as responsible and safe practice.
Although ENG’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. This is only a rough assessment of financial health, and I'm sure ENG has company-specific issues impacting its capital structure decisions. I recommend you continue to research Energa to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ENG’s future growth? Take a look at our free research report of analyst consensus for ENG’s outlook.
- Valuation: What is ENG 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 ENG 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.