Investors are always looking for growth in small-cap stocks like Electronics for Imaging Inc (NASDAQ:EFII), with a market cap of US$1.52b. However, an important fact which most ignore is: how financially healthy is the business? Tech companies, especially ones that are currently loss-making, are inclined towards being higher risk. Assessing first and foremost the financial health is essential. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into EFII here.
How much cash does EFII generate through its operations?
EFII’s debt level has been constant at around US$340.39m over the previous year – this includes both the current and long-term debt. At this current level of debt, EFII currently has US$313.51m remaining in cash and short-term investments for investing into the business. On top of this, EFII has produced US$49.52m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 14.55%, signalling that EFII’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 a positive net income. In EFII’s case, it is able to generate 0.15x cash from its debt capital.
Does EFII’s liquid assets cover its short-term commitments?
With current liabilities at US$292.15m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.55x. Usually, for Tech companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does EFII face the risk of succumbing to its debt-load?With a debt-to-equity ratio of 44.36%, EFII can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since EFII is currently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
At its current level of cash flow coverage, EFII has room for improvement to better cushion for events which may require debt repayment. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how EFII has been performing in the past. You should continue to research Electronics for Imaging to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EFII’s future growth? Take a look at our free research report of analyst consensus for EFII’s outlook.
- Valuation: What is EFII 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 EFII is currently mispriced by the market.
- 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.