Investors are always looking for growth in small-cap stocks like Eden Innovations Ltd (ASX:EDE), with a market cap of AU$81.60m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Oil and Gas industry, in particular ones that run negative earnings, tend to be high risk. Assessing first and foremost the financial health is essential. 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 suggest you dig deeper yourself into EDE here.
Does EDE produce enough cash relative to debt?
EDE has shrunken its total debt levels in the last twelve months, from AU$1.46m to AU$1.14m – this includes both the current and long-term debt. With this debt payback, EDE currently has AU$1.04m remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of EDE’s operating efficiency ratios such as ROA here.
Can EDE meet its short-term obligations with the cash in hand?
With current liabilities at AU$1.53m, it appears that the company has been able to meet these commitments with a current assets level of AU$2.34m, leading to a 1.53x current account ratio. Usually, for Oil and Gas companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is EDE’s debt level acceptable?EDE’s level of debt is low relative to its total equity, at 7.85%. This range is considered safe as EDE is not taking on too much debt obligation, which may be constraining for future growth. Risk around debt is extremely low for EDE, and the company also has the ability and headroom to increase debt if needed going forward.
EDE’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for EDE’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Eden Innovations to get a more holistic view of the stock by looking at:
- Historical Performance: What has EDE’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.