Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Investors are always looking for growth in small-cap stocks like Echo Global Logistics, Inc. (NASDAQ:ECHO), with a market cap of US$543m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into ECHO here.
ECHO’s Debt (And Cash Flows)
Over the past year, ECHO has maintained its debt levels at around US$217m which accounts for long term debt. At this current level of debt, ECHO's cash and short-term investments stands at US$38m , ready to be used for running the business. On top of this, ECHO has generated cash from operations of US$101m over the same time period, leading to an operating cash to total debt ratio of 46%, indicating that ECHO’s debt is appropriately covered by operating cash.
Can ECHO pay its short-term liabilities?
Looking at ECHO’s US$267m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$383m, with a current ratio of 1.44x. The current ratio is the number you get when you divide current assets by current liabilities. For Logistics 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.
Can ECHO service its debt comfortably?
ECHO is a relatively highly levered company with a debt-to-equity of 46%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. 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 3.49x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
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. This is only a rough assessment of financial health, and I'm sure ECHO has company-specific issues impacting its capital structure decisions. I suggest 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.
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 email@example.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.