Investors are always looking for growth in small-cap stocks like ECSC Group plc (AIM:ECSC), with a market cap of UK£11.81M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the IT industry, especially ones that are currently loss-making, tend to be high risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I suggest you dig deeper yourself into ECSC here.
How does ECSC’s operating cash flow stack up against its debt?
Over the past year, ECSC has borrowed debt capital of around UK£61.00K . With this growth in debt, ECSC currently has UK£1.60M remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can examine some of ECSC’s operating efficiency ratios such as ROA here.
Does ECSC’s liquid assets cover its short-term commitments?
With current liabilities at UK£1.40M, it appears that the company has been able to meet these commitments with a current assets level of UK£2.90M, leading to a 2.07x current account ratio. Generally, for IT companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can ECSC service its debt comfortably?
ECSC’s level of debt is low relative to its total equity, at 2.56%. ECSC is not taking on too much debt commitment, which may be constraining for future growth. Risk around debt is extremely low for ECSC, and the company also has the ability and headroom to increase debt if needed going forward.Next Steps:
ECSC’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 will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure ECSC has company-specific issues impacting its capital structure decisions. I recommend you continue to research ECSC Group to get a more holistic view of the stock by looking at:
- 1. Historical Performance: What has ECSC’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.