Erbud S.A. (WSE:ERB) is a small-cap stock with a market capitalization of zł163m. 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? Given that ERB is not presently profitable, it’s essential to understand the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is just a partial view of the stock, and I suggest you dig deeper yourself into ERB here.
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Does ERB Produce Much Cash Relative To Its Debt?
ERB's debt levels have fallen from zł171m to zł149m over the last 12 months – this includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at zł99m , ready to be used for running the business. On top of this, ERB has generated zł72m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 49%, indicating that ERB’s operating cash is sufficient to cover its debt.
Does ERB’s liquid assets cover its short-term commitments?
At the current liabilities level of zł705m, it appears that the company has been able to meet these obligations given the level of current assets of zł899m, with a current ratio of 1.27x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Construction 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 ERB’s debt level acceptable?
With a debt-to-equity ratio of 61%, ERB can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. Though, since ERB is presently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
ERB’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. I admit this is a fairly basic analysis for ERB's financial health. Other important fundamentals need to be considered alongside. You should continue to research Erbud to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ERB’s future growth? Take a look at our free research report of analyst consensus for ERB’s outlook.
- Valuation: What is ERB 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 ERB 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.