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Investors are always looking for growth in small-cap stocks like Embelton Limited (ASX:EMB), with a market cap of AU$23m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is 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. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into EMB here.
Does EMB Produce Much Cash Relative To Its Debt?
EMB’s debt levels surged from AU$6.6m to AU$7.0m over the last 12 months , which accounts for long term debt. With this rise in debt, EMB currently has AU$1.1m remaining in cash and short-term investments , ready to be used for running the business. Moreover, EMB has generated AU$2.8m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 40%, indicating that EMB’s current level of operating cash is high enough to cover debt.
Can EMB pay its short-term liabilities?
At the current liabilities level of AU$6.3m, the company has been able to meet these obligations given the level of current assets of AU$20m, with a current ratio of 3.18x. The current ratio is calculated by dividing current assets by current liabilities. Having said that, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Is EMB’s debt level acceptable?
With a debt-to-equity ratio of 40%, EMB can be considered as an above-average leveraged company. 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 EMB 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 EMB’s, case, the ratio of 11x 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.
Next Steps:
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. This is only a rough assessment of financial health, and I’m sure EMB has company-specific issues impacting its capital structure decisions. I recommend 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.
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.