Are Elton International Trading Company S.A.’s (ATH:ELTON) Interest Costs Too High?

Elton International Trading Company S.A. (ATH:ELTON) is a small-cap stock with a market capitalization of €37m. 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? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I recommend you dig deeper yourself into ELTON here.

Does ELTON produce enough cash relative to debt?

ELTON has built up its total debt levels in the last twelve months, from €20m to €25m , which includes long-term debt. With this increase in debt, ELTON’s cash and short-term investments stands at €3.6m for investing 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 take a look at some of ELTON’s operating efficiency ratios such as ROA here.

Can ELTON pay its short-term liabilities?

Looking at ELTON’s €40m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.05x. Generally, for Trade Distributors companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

ATSE:ELTON Historical Debt, February 28th 2019
ATSE:ELTON Historical Debt, February 28th 2019

Can ELTON service its debt comfortably?

With debt reaching 49% of equity, ELTON may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if ELTON’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 ELTON, the ratio of 4.69x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

Although ELTON’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 ELTON has been performing in the past. You should continue to research Elton International Trading to get a better picture of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for ELTON’s future growth? Take a look at our free research report of analyst consensus for ELTON’s outlook.
  2. Historical Performance: What has ELTON’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.
  3. 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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