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Is Callaway Golf Company's (NYSE:ELY) Balance Sheet A Threat To Its Future?

Simply Wall St

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Investors are always looking for growth in small-cap stocks like Callaway Golf Company (NYSE:ELY), with a market cap of US$1.7b. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company's financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, these checks don't give you a full picture, so I recommend you dig deeper yourself into ELY here.

Does ELY Produce Much Cash Relative To Its Debt?

ELY has built up its total debt levels in the last twelve months, from US$190m to US$823m – this includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$79m to keep the business going. Moreover, ELY has produced cash from operations of US$81m during the same period of time, leading to an operating cash to total debt ratio of 9.8%, indicating that ELY’s current level of operating cash is not high enough to cover debt.

Does ELY’s liquid assets cover its short-term commitments?

Looking at ELY’s US$518m in current liabilities, the company has been able to meet these obligations given the level of current assets of US$823m, with a current ratio of 1.59x. The current ratio is the number you get when you divide current assets by current liabilities. For Leisure companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NYSE:ELY Historical Debt, June 14th 2019

Is ELY’s debt level acceptable?

With a debt-to-equity ratio of 92%, ELY can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether ELY is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In ELY's, case, the ratio of 9.64x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving ELY ample headroom to grow its debt facilities.

Next Steps:

ELY’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around ELY's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for ELY's financial health. Other important fundamentals need to be considered alongside. You should continue to research Callaway Golf to get a more holistic view of the small-cap by looking at:

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

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.