Edison SA. (WSE:EDN) is a small-cap stock with a market capitalization of ZŁ4.57M. 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? Companies operating in the Software industry, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into EDN here.
Does EDN generate an acceptable amount of cash through operations?
EDN’s debt levels surged from ZŁ284.90K to ZŁ1.50M over the last 12 months made up of predominantly near term debt. With this growth in debt, the current cash and short-term investment levels stands at ZŁ3.91M for investing into the business. Moreover, EDN has produced ZŁ541.06K in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 36.03%, meaning that EDN’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In EDN’s case, it is able to generate 0.36x cash from its debt capital.
Can EDN pay its short-term liabilities?
At the current liabilities level of ZŁ1.33M liabilities, it appears that the company has been able to meet these commitments with a current assets level of ZŁ5.69M, leading to a 4.27x current account ratio. Though, anything about 3x may be excessive, since EDN may be leaving too much capital in low-earning investments.
Is EDN’s debt level acceptable?
With debt at 28.67% of equity, EDN may be thought of as appropriately levered. This range is considered safe as EDN is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether EDN 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 EDN’s, case, the ratio of 23.34x 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.
EDN’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure EDN has company-specific issues impacting its capital structure decisions. You should continue to research Edison to get a better picture of the stock by looking at:
- Valuation: What is EDN 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 EDN is currently mispriced by the market.
- Historical Performance: What has EDN’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 our analysis for more clarity.
- 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 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.