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Investors are always looking for growth in small-cap stocks like IDP Education Limited (ASX:IEL), with a market cap of AU$4.3b. 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. The following basic checks can help you get a picture of the company’s balance sheet strength. However, this is just a partial view of the stock, and I recommend you dig deeper yourself into IEL here.
Does IEL Produce Much Cash Relative To Its Debt?
IEL’s debt levels surged from AU$47m to AU$64m over the last 12 months , which accounts for long term debt. With this increase in debt, IEL’s cash and short-term investments stands at AU$55m to keep the business going. Additionally, IEL has generated cash from operations of AU$84m over the same time period, resulting in an operating cash to total debt ratio of 130%, signalling that IEL’s operating cash is sufficient to cover its debt.
Does IEL’s liquid assets cover its short-term commitments?
Looking at IEL’s AU$134m in current liabilities, the company has been able to meet these obligations given the level of current assets of AU$179m, with a current ratio of 1.34x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Consumer Services 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.
Does IEL face the risk of succumbing to its debt-load?
With debt reaching 41% of equity, IEL may be thought of as relatively highly levered. 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 IEL’s case, the ratio of 113x 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 IEL’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 IEL’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 IEL has company-specific issues impacting its capital structure decisions. I suggest you continue to research IDP Education to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for IEL’s future growth? Take a look at our free research report of analyst consensus for IEL’s outlook.
- Valuation: What is IEL 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 IEL 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.
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 email@example.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.