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Is Zotefoams plc’s (LON:ZTF) Balance Sheet A Threat To Its Future?

Zotefoams plc (LON:ZTF) is a small-cap stock with a market capitalization of UK£258m. 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. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into ZTF here.

How much cash does ZTF generate through its operations?

Over the past year, ZTF has reduced its debt from UK£16m to UK£13m , which is made up of current and long term debt. With this reduction in debt, ZTF currently has UK£6m remaining in cash and short-term investments , ready to deploy into the business. Moreover, ZTF has produced UK£2m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 12%, signalling that ZTF’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ZTF’s case, it is able to generate 0.12x cash from its debt capital.

Does ZTF’s liquid assets cover its short-term commitments?

Looking at ZTF’s most recent UK£20m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.36x. For Chemicals companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.

LSE:ZTF Historical Debt November 2nd 18
LSE:ZTF Historical Debt November 2nd 18

Can ZTF service its debt comfortably?

With debt at 16% of equity, ZTF may be thought of as appropriately levered. ZTF is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether ZTF 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 ZTF’s, case, the ratio of 23.26x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as ZTF’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although ZTF’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how ZTF has been performing in the past. You should continue to research Zotefoams to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for ZTF’s future growth? Take a look at our free research report of analyst consensus for ZTF’s outlook.

  2. Valuation: What is ZTF 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 ZTF is currently mispriced by the market.

  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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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