Investors are always looking for growth in small-cap stocks like Eckoh plc (LON:ECK), with a market cap of UK£88m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the IT industry, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I suggest you dig deeper yourself into ECK here.
How much cash does ECK generate through its operations?
ECK’s debt levels have fallen from UK£5.2m to UK£3.9m over the last 12 months , which includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at UK£7.3m , ready to deploy into the business. Additionally, ECK has generated UK£4.3m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 110%, meaning that ECK’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In ECK’s case, it is able to generate 1.1x cash from its debt capital.
Can ECK meet its short-term obligations with the cash in hand?
With current liabilities at UK£18m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.23x. For IT companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Can ECK service its debt comfortably?
With debt at 23% of equity, ECK may be thought of as appropriately levered. ECK is not taking on too much debt commitment, which may be constraining for future growth. We can test if ECK’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 ECK, the ratio of 32.42x suggests that interest is comfortably 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.
ECK has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how ECK has been performing in the past. You should continue to research Eckoh to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ECK’s future growth? Take a look at our free research report of analyst consensus for ECK’s outlook.
- Valuation: What is ECK 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 ECK 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 email@example.com.