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Edgewell Personal Care Company (NYSE:EPC) is a small-cap stock with a market capitalization of US$2.2b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, these checks don't give you a full picture, so I suggest you dig deeper yourself into EPC here.
EPC’s Debt (And Cash Flows)
Over the past year, EPC has reduced its debt from US$1.7b to US$1.3b , which includes long-term debt. With this reduction in debt, EPC currently has US$240m remaining in cash and short-term investments , ready to be used for running the business. Additionally, EPC has generated US$242m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 18%, indicating that EPC’s current level of operating cash is not high enough to cover debt.
Can EPC pay its short-term liabilities?
At the current liabilities level of US$615m, it seems that the business has been able to meet these commitments with a current assets level of US$900m, leading to a 1.46x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Personal Products 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.
Does EPC face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 77%, EPC can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether EPC is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In EPC's, case, the ratio of 4.96x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving EPC ample headroom to grow its debt facilities.
Although EPC’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. Since there is also no concerns around EPC's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how EPC has been performing in the past. You should continue to research Edgewell Personal Care to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EPC’s future growth? Take a look at our free research report of analyst consensus for EPC’s outlook.
- Valuation: What is EPC 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 EPC 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.