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While small-cap stocks, such as Echo Global Logistics, Inc. (NASDAQ:ECHO) with its market cap of US$678m, 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, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into ECHO here.
How much cash does ECHO generate through its operations?
Over the past year, ECHO has maintained its debt levels at around US$217m including long-term debt. At this constant level of debt, ECHO currently has US$61m remaining in cash and short-term investments for investing into the business. Moreover, ECHO has generated US$71m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 33%, meaning that ECHO’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ECHO’s case, it is able to generate 0.33x cash from its debt capital.
Can ECHO meet its short-term obligations with the cash in hand?
With current liabilities at US$305m, it seems that the business has been able to meet these obligations given the level of current assets of US$459m, with a current ratio of 1.51x. Generally, for Logistics companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does ECHO face the risk of succumbing to its debt-load?
ECHO is a relatively highly levered company with a debt-to-equity of 55%. 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 ECHO’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 ECHO, the ratio of 3.38x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving ECHO ample headroom to grow its debt facilities.
Although ECHO’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. 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 ECHO has been performing in the past. I recommend you continue to research Echo Global Logistics to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ECHO’s future growth? Take a look at our free research report of analyst consensus for ECHO’s outlook.
- Valuation: What is ECHO 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 ECHO 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.