While small-cap stocks, such as EchoStar Corporation (NASDAQ:SATS) with its market cap of US$3.7b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that SATS is not presently profitable, it’s crucial to understand the current state of its operations and pathway to profitability. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. However, these checks don’t give you a full picture, so I’d encourage you to dig deeper yourself into SATS here.
Does SATS Produce Much Cash Relative To Its Debt?
SATS has sustained its debt level by about US$3.5b over the last 12 months which accounts for long term debt. At this constant level of debt, SATS currently has US$3.2b remaining in cash and short-term investments , ready to be used for running the business. Moreover, SATS has generated cash from operations of US$735m in the last twelve months, resulting in an operating cash to total debt ratio of 21%, meaning that SATS’s current level of operating cash is high enough to cover debt.
Can SATS meet its short-term obligations with the cash in hand?
Looking at SATS’s US$1.3b in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.66x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Communications companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can SATS service its debt comfortably?
SATS is a relatively highly levered company with a debt-to-equity of 85%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. However, since SATS is currently loss-making, 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.
Although SATS’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around SATS’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for SATS’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research EchoStar to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SATS’s future growth? Take a look at our free research report of analyst consensus for SATS’s outlook.
- Valuation: What is SATS 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 SATS 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.
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