Yahoo Finance Is ElringKlinger AG’s (FRA:ZIL2) Balance Sheet Strong Enough To Weather A Storm?
ElringKlinger AG (FRA:ZIL2) is a small-cap stock with a market capitalization of €607m. 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. 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 ZIL2 here.
Does ZIL2 produce enough cash relative to debt?
ZIL2 has built up its total debt levels in the last twelve months, from €668m to €733m – this includes both the current and long-term debt. With this rise in debt, ZIL2’s cash and short-term investments stands at €51m , ready to deploy into the business. On top of this, ZIL2 has produced €73m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 9.9%, indicating that ZIL2’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 ZIL2’s case, it is able to generate 0.099x cash from its debt capital.
Can ZIL2 pay its short-term liabilities?
With current liabilities at €535m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.57x. Usually, for Auto Components companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can ZIL2 service its debt comfortably?
ZIL2 is a relatively highly levered company with a debt-to-equity of 84%. 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 ZIL2’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 ZIL2, the ratio of 8.54x 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.
Next Steps:
At its current level of cash flow coverage, ZIL2 has room for improvement to better cushion for events which may require debt repayment. Though, 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 ZIL2’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research ElringKlinger to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for ZIL2’s future growth? Take a look at our free research report of analyst consensus for ZIL2’s outlook.
Historical Performance: What has ZIL2’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.
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.
