Investors are always looking for growth in small-cap stocks like Eckoh plc (LON:ECK), with a market cap of UK£95m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the IT industry, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is crucial. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into ECK here.
Does ECK produce enough cash relative to debt?
ECK’s debt levels have fallen from UK£5.2m to UK£3.9m over the last 12 months , which includes long-term debt. With this debt payback, ECK currently has UK£7.3m remaining in cash and short-term investments , ready to deploy into the business. Additionally, ECK has produced UK£4.3m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 110%, signalling that ECK’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ECK’s case, it is able to generate 1.1x cash from its debt capital.
Can ECK meet its short-term obligations with the cash in hand?
Looking at ECK’s UK£18m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.23x. Generally, for IT companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does ECK face the risk of succumbing to its debt-load?
ECK’s level of debt is appropriate relative to its total equity, at 23%. ECK is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if ECK’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 ECK, the ratio of 32.42x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving ECK ample headroom to grow its debt facilities.
Next Steps:
ECK’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for ECK’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Eckoh to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ECK’s future growth? Take a look at our free research report of analyst consensus for ECK’s outlook.
- Valuation: What is ECK 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 ECK 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.
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.