Are Ramada Investimentos e Industria, S.A.'s (ELI:RAM) Interest Costs Too High?

Simply Wall St

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Investors are always looking for growth in small-cap stocks like Ramada Investimentos e Industria, S.A. (ELI:RAM), with a market cap of €179m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is not a comprehensive overview, so I recommend you dig deeper yourself into RAM here.

RAM’s Debt (And Cash Flows)

Over the past year, RAM has reduced its debt from €108m to €88m , which includes long-term debt. With this debt payback, RAM currently has €74m remaining in cash and short-term investments to keep the business going. Additionally, RAM has generated cash from operations of €1.6m over the same time period, leading to an operating cash to total debt ratio of 1.8%, meaning that RAM’s debt is not covered by operating cash.

Can RAM meet its short-term obligations with the cash in hand?

With current liabilities at €67m, it seems that the business has been able to meet these obligations given the level of current assets of €142m, with a current ratio of 2.12x. The current ratio is calculated by dividing current assets by current liabilities. For Metals and Mining companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

ENXTLS:RAM Historical Debt, July 17th 2019

Does RAM face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 66%, RAM can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In RAM's case, the ratio of 9.31x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as RAM’s high interest coverage is seen as responsible and safe practice.

Next Steps:

RAM’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 RAM has been performing in the past. I recommend you continue to research Ramada Investimentos e Industria to get a more holistic view of the small-cap by looking at:

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