While small-cap stocks, such as Inspired Energy PLC (LON:INSE) with its market cap of UK£105m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company’s financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is not a comprehensive overview, so I suggest you dig deeper yourself into INSE here.
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INSE’s Debt (And Cash Flows)
INSE has built up its total debt levels in the last twelve months, from UK£20m to UK£26m , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at UK£2.2m to keep the business going. Additionally, INSE has produced cash from operations of UK£8.2m over the same time period, resulting in an operating cash to total debt ratio of 32%, meaning that INSE’s debt is appropriately covered by operating cash.
Can INSE meet its short-term obligations with the cash in hand?
At the current liabilities level of UK£14m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.67x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Commercial Services companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can INSE service its debt comfortably?
With debt reaching 57% of equity, INSE 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. We can test if INSE’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For INSE, the ratio of 6.44x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as INSE’s high interest coverage is seen as responsible and safe practice.
Although INSE’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how INSE has been performing in the past. You should continue to research Inspired Energy to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for INSE’s future growth? Take a look at our free research report of analyst consensus for INSE’s outlook.
- Valuation: What is INSE 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 INSE 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.
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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.