What does Etherstack plc’s (ASX:ESK) Balance Sheet Tell Us About Its Future?
While small-cap stocks, such as Etherstack plc (ASX:ESK) with its market cap of AU$22.34M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Software industry, in particular ones that run negative earnings, are inclined towards being higher risk. Assessing first and foremost the financial health is essential. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into ESK here.
Does ESK generate enough cash through operations?
ESK has built up its total debt levels in the last twelve months, from US$960.00K to US$2.00M – this includes both the current and long-term debt. With this rise in debt, ESK currently has US$41.00K remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of ESK’s operating efficiency ratios such as ROA here.
Can ESK meet its short-term obligations with the cash in hand?
At the current liabilities level of US$6.43M liabilities, it appears that the company has not been able to meet these commitments with a current assets level of US$2.74M, leading to a 0.43x current account ratio. which is under the appropriate industry ratio of 3x.
Does ESK face the risk of succumbing to its debt-load?
With total debt exceeding equities, ESK is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since ESK is currently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
ESK’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how ESK has been performing in the past. I recommend you continue to research Etherstack to get a more holistic view of the stock by looking at the areas below. Just a heads up – to access some parts of the Simply Wall St research tool you might be asked to create a free account, but it takes just one click and the information they provide is definitely worth it in my opinion.
1. Historical Performance: What has ESK’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of ESK’s historicals for more clarity.
2. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore a free list of these great stocks here.
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.
