Elec & Eltek International Company Limited (SGX:E16): Time For A Financial Health Check
Elec & Eltek International Company Limited (SGX:E16) is a small-cap stock with a market capitalization of US$250.5m. 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 Electronic industry, even ones that are profitable, are more likely to be higher 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. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into E16 here.
Does E16 produce enough cash relative to debt?
E16 has built up its total debt levels in the last twelve months, from US$61.2m to US$104.8m , which is made up of current and long term debt. With this rise in debt, the current cash and short-term investment levels stands at US$20.0m for investing into the business. On top of this, E16 has produced US$64.7m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 61.7%, meaning that E16’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 E16’s case, it is able to generate 0.62x cash from its debt capital.
Can E16 meet its short-term obligations with the cash in hand?
At the current liabilities level of US$265.6m liabilities, the company has been able to meet these commitments with a current assets level of US$272.1m, leading to a 1.02x current account ratio. For Electronic companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is E16’s debt level acceptable?
E16’s level of debt is appropriate relative to its total equity, at 26.1%. This range is considered safe as E16 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if E16’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 E16, the ratio of 31.79x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as E16’s high interest coverage is seen as responsible and safe practice.
Next Steps:
E16’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure E16 has company-specific issues impacting its capital structure decisions. You should continue to research Elec & Eltek International to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for E16’s future growth? Take a look at our free research report of analyst consensus for E16’s outlook.
Historical Performance: What has E16’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 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 editorial-team@simplywallst.com.
