While small-cap stocks, such as Empire Industries Ltd (CVE:EIL) with its market cap of CA$42.30m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that EIL is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. However, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into EIL here.
How does EIL’s operating cash flow stack up against its debt?
Over the past year, EIL has reduced its debt from CA$27.42m to CA$14.58m , which is made up of current and long term debt. With this reduction in debt, the current cash and short-term investment levels stands at CA$83.00k , ready to deploy into the business. Moreover, EIL has produced cash from operations of CA$3.31m over the same time period, resulting in an operating cash to total debt ratio of 22.67%, indicating that EIL’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable companies since metrics such as return on asset (ROA) requires a positive net income. In EIL’s case, it is able to generate 0.23x cash from its debt capital.
Does EIL’s liquid assets cover its short-term commitments?
Looking at EIL’s most recent CA$57.26m liabilities, it seems that the business is not able to meet these obligations given the level of current assets of CA$42.08m, with a current ratio of 0.73x below the prudent level of 3x.
Is EIL’s debt level acceptable?Since total debt levels have outpaced equities, EIL is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since EIL is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
EIL’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how EIL has been performing in the past. I recommend you continue to research Empire Industries to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EIL’s future growth? Take a look at our free research report of analyst consensus for EIL’s outlook.
- 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.