Stelmet SA. (WSE:STL) is a small-cap stock with a market capitalization of ZŁ446.34M. 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? Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into STL here.
Does STL generate an acceptable amount of cash through operations?
STL has built up its total debt levels in the last twelve months, from ZŁ232.70M to ZŁ253.16M , which is made up of current and long term debt. With this growth in debt, the current cash and short-term investment levels stands at ZŁ72.56M , ready to deploy into the business. Moreover, STL has produced cash from operations of ZŁ39.28M in the last twelve months, leading to an operating cash to total debt ratio of 15.52%, signalling that STL’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In STL’s case, it is able to generate 0.16x cash from its debt capital.
Does STL’s liquid assets cover its short-term commitments?
With current liabilities at ZŁ145.95M, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.83x. Generally, for Forestry companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can STL service its debt comfortably?
STL is a relatively highly levered company with a debt-to-equity of 55.43%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if STL’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For STL, the ratio of 7.23x suggests that interest is appropriately 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.
STL’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for STL’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Stelmet to get a better picture of the stock by looking at:
- 1. Valuation: What is STL 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 STL is currently mispriced by the market.
- 2. Historical Performance: What has STL’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.
- 3. 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.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.