What You Must Know About Echo Energy plc's (LON:ECHO) Financial Strength

Echo Energy plc (AIM:ECHO) is a small-cap stock with a market capitalization of UK£61.71M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Companies operating in the Oil and Gas industry, especially ones that are currently loss-making, are inclined towards being higher risk. Assessing first and foremost the financial health is essential. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into ECHO here.

How does ECHO’s operating cash flow stack up against its debt?

Over the past year, ECHO has borrowed debt capital of around UK£11.41M comprising of short- and long-term debt. With this increase in debt, ECHO's cash and short-term investments stands at UK£19.72M , 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 ECHO’s operating efficiency ratios such as ROA here.

Can ECHO pay its short-term liabilities?

At the current liabilities level of UK£2.53M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 8.24x. Though, anything above 3x is considered high and could mean that ECHO has too much idle capital in low-earning investments.

Is ECHO’s debt level acceptable?

Since total debt levels have outpaced equities, ECHO is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since ECHO is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

ECHO’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I'm sure ECHO has company-specific issues impacting its capital structure decisions. I suggest you continue to research Echo Energy to get a better picture of the stock by looking at:

1. Historical Performance: What has ECHO'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.
2. 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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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.