Investors are always looking for growth in small-cap stocks like Entercom Communications Corp. (NYSE:ETM), with a market cap of US$918m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into ETM here.
Does ETM produce enough cash relative to debt?
ETM’s debt levels surged from US$475m to US$1.9b over the last 12 months – this includes long-term debt. With this growth in debt, ETM currently has US$200m remaining in cash and short-term investments for investing into the business. Moreover, ETM has generated US$97m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 5.0%, signalling that ETM’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ETM’s case, it is able to generate 0.05x cash from its debt capital.
Can ETM pay its short-term liabilities?
At the current liabilities level of US$228m, it seems that the business has been able to meet these commitments with a current assets level of US$612m, leading to a 2.68x current account ratio. Generally, for Media companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does ETM face the risk of succumbing to its debt-load?
ETM is a highly-leveraged company with debt exceeding equity by over 100%. 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 ETM’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 ETM, the ratio of 2.07x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as ETM’s low interest coverage already puts the company at higher risk of default.
Although ETM’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. This is only a rough assessment of financial health, and I’m sure ETM has company-specific issues impacting its capital structure decisions. You should continue to research Entercom Communications to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ETM’s future growth? Take a look at our free research report of analyst consensus for ETM’s outlook.
- Valuation: What is ETM 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 ETM 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.