Investors are always looking for growth in small-cap stocks like Impellam Group PLC (LON:IPEL), with a market cap of UK£220m. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company’s financial health becomes vital, since poor capital management may bring about 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. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into IPEL here.
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Does IPEL Produce Much Cash Relative To Its Debt?
Over the past year, IPEL has reduced its debt from UK£176m to UK£149m , which also accounts for long term debt. With this debt repayment, IPEL currently has UK£77m remaining in cash and short-term investments to keep the business going. Additionally, IPEL has produced UK£38m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 26%, meaning that IPEL’s debt is appropriately covered by operating cash.
Does IPEL’s liquid assets cover its short-term commitments?
With current liabilities at UK£536m, it appears that the company has been able to meet these obligations given the level of current assets of UK£646m, with a current ratio of 1.21x. The current ratio is calculated by dividing current assets by current liabilities. For Professional Services companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Is IPEL’s debt level acceptable?
With a debt-to-equity ratio of 55%, IPEL can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if IPEL’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 IPEL, the ratio of 3.37x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as IPEL’s high interest coverage is seen as responsible and safe practice.
Although IPEL’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. This is only a rough assessment of financial health, and I’m sure IPEL has company-specific issues impacting its capital structure decisions. I suggest you continue to research Impellam Group to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for IPEL’s future growth? Take a look at our free research report of analyst consensus for IPEL’s outlook.
- Valuation: What is IPEL 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 IPEL 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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