U.S. markets closed
  • S&P Futures

    -5.50 (-0.13%)
  • Dow Futures

    -16.00 (-0.05%)
  • Nasdaq Futures

    -39.75 (-0.28%)
  • Russell 2000 Futures

    -3.10 (-0.14%)
  • Crude Oil

    -0.02 (-0.03%)
  • Gold

    -4.10 (-0.23%)
  • Silver

    -0.08 (-0.32%)

    -0.0013 (-0.11%)
  • 10-Yr Bond

    -0.1080 (-6.59%)
  • Vix

    -0.42 (-2.47%)

    -0.0030 (-0.22%)

    +0.1550 (+0.14%)

    +558.70 (+0.89%)
  • CMC Crypto 200

    +21.59 (+1.56%)
  • FTSE 100

    +43.92 (+0.63%)
  • Nikkei 225

    +39.97 (+0.13%)

Is ESCO Technologies Inc. (NYSE:ESE) As Strong As Its Balance Sheet Indicates?

  • Oops!
    Something went wrong.
    Please try again later.
Simply Wall St
  • Oops!
    Something went wrong.
    Please try again later.

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as ESCO Technologies Inc. (NYSE:ESE), with a market capitalization of US$2.0b, rarely draw their attention from the investing community. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Today we will look at ESE’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Don’t forget that this is a general and concentrated examination of ESCO Technologies's financial health, so you should conduct further analysis into ESE here.

Check out our latest analysis for ESCO Technologies

ESE’s Debt (And Cash Flows)

ESE has shrunk its total debt levels in the last twelve months, from US$290m to US$217m , which also accounts for long term debt. With this debt payback, the current cash and short-term investment levels stands at US$35m , ready to be used for running the business. Additionally, ESE has generated US$77m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 35%, meaning that ESE’s current level of operating cash is high enough to cover debt.

Can ESE meet its short-term obligations with the cash in hand?

At the current liabilities level of US$202m, the company has been able to meet these obligations given the level of current assets of US$436m, with a current ratio of 2.16x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Machinery companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

NYSE:ESE Historical Debt, June 26th 2019
NYSE:ESE Historical Debt, June 26th 2019

Is ESE’s debt level acceptable?

ESE’s level of debt is appropriate relative to its total equity, at 27%. This range is considered safe as ESE is not taking on too much debt obligation, which may be constraining for future growth. We can test if ESE’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 ESE, the ratio of 13.42x 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.

Next Steps:

ESE’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. Furthermore, 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 ESE has company-specific issues impacting its capital structure decisions. You should continue to research ESCO Technologies to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for ESE’s future growth? Take a look at our free research report of analyst consensus for ESE’s outlook.

  2. Valuation: What is ESE 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 ESE is currently mispriced by the market.

  3. 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 editorial-team@simplywallst.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.