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Trelleborg AB (publ) (STO:TREL B) is a small-cap stock with a market capitalization of kr36b. 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 crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, this is not a comprehensive overview, so I suggest you dig deeper yourself into TREL B here.

Does TREL B Produce Much Cash Relative To Its Debt?

TREL B's debt levels surged from kr13b to kr18b over the last 12 months – this includes long-term debt. With this rise in debt, TREL B currently has kr2.4b remaining in cash and short-term investments to keep the business going. Moreover, TREL B has generated kr3.9b in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 22%, indicating that TREL B’s operating cash is sufficient to cover its debt.

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

At the current liabilities level of kr13b, the company has been able to meet these obligations given the level of current assets of kr18b, with a current ratio of 1.38x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Machinery 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 TREL B’s debt level acceptable?

With debt reaching 59% of equity, TREL B may be thought of as relatively highly levered. 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 TREL B 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 TREL B's, case, the ratio of 14.19x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as TREL B’s high interest coverage is seen as responsible and safe practice.

Next Steps:

TREL B’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how TREL B has been performing in the past. I suggest you continue to research Trelleborg to get a more holistic view of the small-cap by looking at:

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

2. Valuation: What is TREL B 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 TREL B 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.