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While small-cap stocks, such as Embelton Limited (ASX:EMB) with its market cap of AU$28m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into EMB here.
How much cash does EMB generate through its operations?
Over the past year, EMB has ramped up its debt from AU$2.8m to AU$7.7m , which includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at AU$59k for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of EMB’s operating efficiency ratios such as ROA here.
Does EMB’s liquid assets cover its short-term commitments?
At the current liabilities level of AU$10m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.29x. Usually, for Building 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.
Can EMB service its debt comfortably?
With a debt-to-equity ratio of 45%, EMB can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 after interest and tax at least three times its net interest payments is considered financially sound. In EMB’s case, the ratio of 12.49x suggests that interest is comfortably 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.
Although EMB’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around EMB’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how EMB has been performing in the past. I suggest you continue to research Embelton to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EMB’s future growth? Take a look at our free research report of analyst consensus for EMB’s outlook.
- Historical Performance: What has EMB’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 firstname.lastname@example.org.