While small-cap stocks, such as Eltek Ltd (NASDAQ:ELTK) with its market cap of USD $6.47M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. There are always disruptions which destabilize an existing industry, in which most small-cap companies are the first casualties. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge. Check out our latest analysis for Eltek
Does ELTK generate enough cash through operations?
While failure to manage cash has been one of the major reasons behind the demise of a lot of small businesses, mismanagement comes into the light during tough situations such as an economic recession. These adverse events bring devastation and yet does not absolve the company from its debt. We can test the impact of these adverse events by looking at whether cash from its current operations can pay back its current debt obligations. In the case of ELTK, operating cash flow turned out to be -0.32x its debt level over the past twelve months. This means what ELTK can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at ELTK’s operations at this point in time.
Does ELTK’s liquid assets cover its short-term commitments?
What about its commitments to other stakeholders such as payments to suppliers and employees? During times of unfavourable events, ELTK could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that ELTK does not have enough liquid assets on hand to meet its upcoming liabilities. Though this is a common practice, since cash is better utilized invested in the business or returned to shareholders, it does raise some concerns for investors should adverse events arise.
Is ELTK’s level of debt at an acceptable level?
Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. In the case of ELTK, the debt-to-equity ratio is over 100%, which means that it is a highly leveraged company. This is not a problem if the company has consistently grown its profits. But during a business downturn, as liquidity may dry up, making it hard to operate.
Are you a shareholder? ELTK’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, the company may struggle to meet its near term liabilities should an adverse event occur. In the future, its financial position may be different. I recommend researching market expectations for ELTK’s future growth on our free analysis platform.
Are you a potential investor? ELTK’s large debt ratio along with poor cash coverage in addition to low liquidity coverage of short-term commitments may not be what you’re after in an investment. But, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of ELTK’s track record. I encourage you to continue your research by taking a look at ELTK’s past performance analysis on our free platform to conclude on ELTK’s financial health.
To help readers see pass 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.