While small-cap stocks, such as Energy Action Limited (ASX:EAX) with its market cap of AU$25m, 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 vital, 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, since I only look at basic financial figures, I recommend you dig deeper yourself into EAX here.
How does EAX’s operating cash flow stack up against its debt?
Over the past year, EAX has reduced its debt from AU$9.0m to AU$5.0m , which includes long-term debt. With this debt repayment, EAX’s cash and short-term investments stands at AU$1.2m , ready to deploy into the business. On top of this, EAX has produced AU$5.3m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 105%, meaning that EAX’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In EAX’s case, it is able to generate 1.05x cash from its debt capital.
Does EAX’s liquid assets cover its short-term commitments?
With current liabilities at AU$2.9m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.54x. For Professional Services companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Can EAX service its debt comfortably?
With a debt-to-equity ratio of 34%, EAX’s debt level may be seen as prudent. This range is considered safe as EAX is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether EAX 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 EAX’s, case, the ratio of 9.4x 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.
EAX has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure EAX has company-specific issues impacting its capital structure decisions. You should continue to research Energy Action to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EAX’s future growth? Take a look at our free research report of analyst consensus for EAX’s outlook.
- Valuation: What is EAX 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 EAX is currently mispriced by the market.
- 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.