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While small-cap stocks, such as Endeavour Mining Corporation (TSE:EDV) with its market cap of CA$2.4b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since EDV is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. However, these checks don't give you a full picture, so I suggest you dig deeper yourself into EDV here.
Does EDV Produce Much Cash Relative To Its Debt?
EDV has built up its total debt levels in the last twelve months, from US$420m to US$703m , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at US$85m , ready to be used for running the business. Moreover, EDV has generated US$226m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 32%, indicating that EDV’s debt is appropriately covered by operating cash.
Can EDV meet its short-term obligations with the cash in hand?
With current liabilities at US$252m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.15x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Metals and Mining companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is EDV’s debt level acceptable?
With a debt-to-equity ratio of 75%, EDV 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. Though, since EDV is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although EDV’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 EDV'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 EDV has been performing in the past. I recommend you continue to research Endeavour Mining to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EDV’s future growth? Take a look at our free research report of analyst consensus for EDV’s outlook.
- Valuation: What is EDV 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 EDV 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.