Posted on November 29, 2018
Arcadis NV (AMS:ARCAD) is a small-cap stock with a market capitalization of €985m. 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 essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I suggest you dig deeper yourself into ARCAD here.
How much cash does ARCAD generate through its operations?
ARCAD has shrunken its total debt levels in the last twelve months, from €800m to €718m , which includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at €241m for investing into the business. On top of this, ARCAD has produced cash from operations of €174m over the same time period, leading to an operating cash to total debt ratio of 24%, indicating that ARCAD’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ARCAD’s case, it is able to generate 0.24x cash from its debt capital.
Can ARCAD meet its short-term obligations with the cash in hand?
At the current liabilities level of €1.2b, the company has been able to meet these obligations given the level of current assets of €1.5b, with a current ratio of 1.2x. Usually, for Construction companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can ARCAD service its debt comfortably?
ARCAD is a relatively highly levered company with a debt-to-equity of 71%. 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 ARCAD’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 ARCAD, the ratio of 8.61x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as ARCAD’s high interest coverage is seen as responsible and safe practice.
Source: Simply Wall St
