Is Zotefoams plc’s (LON:ZTF) Balance Sheet Strong Enough To Weather A Storm?
While small-cap stocks, such as Zotefoams plc (LSE:ZTF) with its market cap of £176.78M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to 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. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into ZTF here.
Does ZTF generate an acceptable amount of cash through operations?
Over the past year, ZTF has ramped up its debt from £7.7M to £15.4M , which is made up of current and long term debt. With this growth in debt, ZTF currently has £2.9M remaining in cash and short-term investments , ready to deploy into the business. Moreover, ZTF has generated cash from operations of £5.2M during the same period of time, resulting in an operating cash to total debt ratio of 0.34x, indicating that ZTF’s operating cash is 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 0.34x cash from its debt capital.
Can ZTF meet its short-term obligations with the cash in hand?
Looking at ZTF’s most recent £21.6M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.65x. Usually, for chemicals companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is ZTF’s level of debt at an acceptable level?
ZTF’s level of debt is appropriate relative to its total equity, at 29.23%. ZTF is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if ZTF’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 ZTF, the ratio of 39.94x suggests that interest is excessively covered, which means that debtors may be willing to loan the company more money, giving ZTF ample headroom to grow its debt facilities.
Next Steps:
Are you a shareholder? ZTF’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Moving forward, its financial position may change. I recommend keeping abreast of market expectations for ZTF’s future growth on our free analysis platform.
Are you a potential investor? ZTF’s high cash coverage and low levels of debt indicate its ability to use its borrowings efficiently in order to produce a healthy cash flow. In addition, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. In order to build your confidence in the stock, you need to also analyse the company’s track record. I encourage you to continue your research by taking a look at ZTF’s past performance analysis on our free platform to figure out ZTF’s financial health position.
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.
