While small-cap stocks, such as Eltek Ltd (NASDAQ:ELTK) with its market cap of US$7.83M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Electronic industry, especially ones that are currently loss-making, tend to be high risk. Evaluating financial health as part of your investment thesis is vital. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into ELTK here.
Does ELTK generate an acceptable amount of cash through operations?
Over the past year, ELTK has ramped up its debt from US$4.18M to US$4.82M – this includes both the current and long-term debt. With this rise in debt, ELTK’s cash and short-term investments stands at US$1.23M , ready to deploy into the business. Moreover, ELTK has generated US$165.00K in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 3.42%, signalling that ELTK’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making companies since metrics such as return on asset (ROA) requires a positive net income. In ELTK’s case, it is able to generate 0.034x cash from its debt capital.
Can ELTK pay its short-term liabilities?
Looking at ELTK’s most recent US$11.41M liabilities, the company has not been able to meet these commitments with a current assets level of US$11.32M, leading to a 0.99x current account ratio. which is under the appropriate industry ratio of 3x.
Can ELTK service its debt comfortably?
With total debt exceeding equities, ELTK is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since ELTK is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
ELTK’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure ELTK has company-specific issues impacting its capital structure decisions. I suggest you continue to research Eltek to get a more holistic view of the stock by looking at:
- 1. Historical Performance: What has ELTK’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.
- 2. 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.