Is Endurance International Group Holdings Inc's (NASDAQ:EIGI) Balance Sheet A Threat To Its Future?

Endurance International Group Holdings Inc (NASDAQ:EIGI) is a small-cap stock with a market capitalization of US$1.04B. 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? Companies operating in the Internet industry, especially ones that are currently loss-making, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into EIGI here.

Does EIGI generate enough cash through operations?

EIGI's debt levels surged from US$1.11B to US$1.99B over the last 12 months – this includes both the current and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$53.60M , ready to deploy into the business. Moreover, EIGI has produced US$154.96M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 7.77%, signalling that EIGI’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires positive earnings. In EIGI’s case, it is able to generate 0.078x cash from its debt capital.

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

At the current liabilities level of US$516.79M liabilities, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.3x, which is below the prudent industry ratio of 3x.

Is EIGI’s debt level acceptable?

Since total debt levels have outpaced equities, EIGI is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since EIGI is presently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

EIGI’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I'm sure EIGI has company-specific issues impacting its capital structure decisions. You should continue to research Endurance International Group Holdings to get a better picture of the stock by looking at:

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

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.