Investors are always looking for growth in small-cap stocks like Entercom Communications Corp (NYSE:ETM), with a market cap of US$1.46B. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I suggest you dig deeper yourself into ETM here.
Does ETM generate an acceptable amount of cash through operations?
Over the past year, ETM has maintained its debt levels at around US$472.47M made up of current and long term debt. At this stable level of debt, ETM's cash and short-term investments stands at US$46.84M , ready to deploy into the business. Moreover, ETM has generated US$72.03M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 15.25%, indicating that ETM’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ETM’s case, it is able to generate 0.15x cash from its debt capital.
Can ETM pay its short-term liabilities?
At the current liabilities level of US$67.72M liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$146.69M, leading to a 2.17x current account ratio. Generally, for Media companies, this is a reasonable ratio as there's enough of a cash buffer without holding too capital in low return investments.
Is ETM’s debt level acceptable?ETM is a highly-leveraged company with debt exceeding equity by over 100%. 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 ETM’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 ETM, the ratio of 3.03x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as ETM’s high interest coverage is seen as responsible and safe practice.
ETM’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 ETM's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Entercom Communications to get a more holistic view of the stock by looking at:
- 1. Future Outlook: What are well-informed industry analysts predicting for ETM’s future growth? Take a look at our free research report of analyst consensus for ETM’s outlook.
- 2. Valuation: What is ETM 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 ETM 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.
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.