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Investors are always looking for growth in small-cap stocks like Empire Industries Ltd. (CVE:EIL), with a market cap of CA$35m. However, an important fact which most ignore is: how financially healthy is the business? Given that EIL is not presently profitable, it’s crucial to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into EIL here.
Does EIL produce enough cash relative to debt?
EIL’s debt levels have fallen from CA$22m to CA$20m over the last 12 months , which includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at CA$208k , ready to deploy 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. 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 EIL’s operating efficiency ratios such as ROA here.
Can EIL meet its short-term obligations with the cash in hand?
With current liabilities at CA$75m, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.8x.
Is EIL’s debt level acceptable?
EIL is a relatively highly levered company with a debt-to-equity of 92%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since EIL is presently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Although EIL’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how EIL has been performing in the past. I suggest you continue to research Empire Industries to get a better picture of the stock by looking at:
- Historical Performance: What has EIL’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 editorial-team@simplywallst.com.