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Progress Werk Oberkirch AG (FRA:PWO) is a small-cap stock with a market capitalization of €78m. 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? Understanding the company's financial health becomes vital, since poor capital management may bring about 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, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into PWO here.
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Does PWO Produce Much Cash Relative To Its Debt?
PWO has built up its total debt levels in the last twelve months, from €134m to €144m , which includes long-term debt. With this rise in debt, PWO's cash and short-term investments stands at €10.0m , ready to be used for running the business. Additionally, PWO has generated cash from operations of €46m during the same period of time, resulting in an operating cash to total debt ratio of 32%, signalling that PWO’s current level of operating cash is high enough to cover debt.
Can PWO meet its short-term obligations with the cash in hand?
With current liabilities at €158m, it appears that the company has been able to meet these obligations given the level of current assets of €180m, with a current ratio of 1.14x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Auto Components companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does PWO face the risk of succumbing to its debt-load?
With total debt exceeding equity, PWO is considered a highly levered 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 PWO 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 PWO's, case, the ratio of 2.84x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.