Is Rotala PLC’s (LON:ROL) Balance Sheet Strong Enough To Weather A Storm?
While small-cap stocks, such as Rotala PLC (LON:ROL) with its market cap of UK£25m, 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, 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. Nevertheless, these checks don’t give you a full picture, so I suggest you dig deeper yourself into ROL here.
Does ROL Produce Much Cash Relative To Its Debt?
ROL has built up its total debt levels in the last twelve months, from UK£27m to UK£33m , which accounts for long term debt. With this growth in debt, ROL currently has UK£514k remaining in cash and short-term investments to keep the business going. On top of this, ROL has produced cash from operations of UK£979k over the same time period, resulting in an operating cash to total debt ratio of 2.9%, indicating that ROL’s debt is not covered by operating cash.
Can ROL meet its short-term obligations with the cash in hand?
Looking at ROL’s UK£25m in current liabilities, it seems that the business may not be able to easily meet these obligations given the level of current assets of UK£21m, with a current ratio of 0.83x. The current ratio is the number you get when you divide current assets by current liabilities.
Can ROL service its debt comfortably?
Since total debt levels exceed equity, ROL is a highly leveraged company. 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 ROL 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 ROL’s, case, the ratio of 3.81x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as ROL’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although ROL’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for ROL’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Rotala to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for ROL’s future growth? Take a look at our free research report of analyst consensus for ROL’s outlook.
Historical Performance: What has ROL’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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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