What does EBOS Group Limited's (NZE:EBO) Balance Sheet Tell Us About Its Future?

While small-cap stocks, such as EBOS Group Limited (NZSE:EBO) with its market cap of NZ$2.63B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Healthcare industry, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I suggest you dig deeper yourself into EBO here.

Does EBO generate an acceptable amount of cash through operations?

EBO's debt levels surged from NZ$375.00M to NZ$599.45M over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, EBO's cash and short-term investments stands at NZ$162.18M , ready to deploy into the business. Additionally, EBO has generated NZ$143.94M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 24.01%, meaning that EBO’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In EBO’s case, it is able to generate 0.24x cash from its debt capital.

Can EBO meet its short-term obligations with the cash in hand?

At the current liabilities level of NZ$1.54B liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.16x. Usually, for Healthcare companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Does EBO face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 52.02%, EBO can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether EBO is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In EBO's, case, the ratio of 11.12x suggests that interest is comfortably 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:

EBO’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for EBO's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research EBOS Group to get a better picture of the stock by looking at:

• 1. Future Outlook: What are well-informed industry analysts predicting for EBO’s future growth? Take a look at our free research report of analyst consensus for EBO’s outlook.
• 2. Valuation: What is EBO 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 EBO is currently mispriced by the market.
• 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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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.