You Might Like ZAGG Inc (NASDAQ:ZAGG) But Do You Like Its Debt?

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While small-cap stocks, such as ZAGG Inc (NASDAQ:ZAGG) with its market cap of US$203m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company’s balance sheet strength. However, these checks don’t give you a full picture, so I’d encourage you to dig deeper yourself into ZAGG here.

ZAGG’s Debt (And Cash Flows)

ZAGG’s debt levels surged from US$22m to US$108m over the last 12 months – this includes long-term debt. With this growth in debt, ZAGG’s cash and short-term investments stands at US$15m to keep the business going. Moreover, ZAGG has generated US$4.0m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 3.7%, signalling that ZAGG’s current level of operating cash is not high enough to cover debt.

Does ZAGG’s liquid assets cover its short-term commitments?

At the current liabilities level of US$107m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.01x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Consumer Durables 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.

NasdaqGS:ZAGG Historical Debt, June 5th 2019
NasdaqGS:ZAGG Historical Debt, June 5th 2019

Is ZAGG’s debt level acceptable?

With a debt-to-equity ratio of 69%, ZAGG can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether ZAGG 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 ZAGG’s, case, the ratio of 13.05x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving ZAGG ample headroom to grow its debt facilities.

Next Steps:

ZAGG’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. 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 ZAGG has been performing in the past. You should continue to research ZAGG to get a more holistic view of the small-cap by looking at:

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

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.