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Investors are always looking for growth in small-cap stocks like Ei Group plc (LON:EIG), with a market cap of UK£903m. However, an important fact which most ignore is: how financially healthy is the business? 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. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into EIG here.
Does EIG Produce Much Cash Relative To Its Debt?
Over the past year, EIG has reduced its debt from UK£2.2b to UK£2.1b – this includes long-term debt. With this reduction in debt, EIG's cash and short-term investments stands at UK£338m , ready to be used for running the business. Moreover, EIG has generated UK£278m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 13%, meaning that EIG’s debt is not covered by operating cash.
Does EIG’s liquid assets cover its short-term commitments?
At the current liabilities level of UK£329m, the company has been able to meet these commitments with a current assets level of UK£433m, leading to a 1.32x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Hospitality companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can EIG service its debt comfortably?
Since total debt levels exceed equity, EIG is a highly 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 EIG 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 EIG's, case, the ratio of 1.88x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Although EIG’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 EIG's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure EIG has company-specific issues impacting its capital structure decisions. I recommend you continue to research Ei Group to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EIG’s future growth? Take a look at our free research report of analyst consensus for EIG’s outlook.
- Valuation: What is EIG 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 EIG 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 firstname.lastname@example.org. 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.