EuroDry Ltd (NASDAQ:EDRY) is a small-cap stock with a market capitalization of US$16.0m. 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? So, understanding the company’s financial health becomes essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into EDRY here.
Does EDRY produce enough cash relative to debt?
EDRY has sustained its debt level by about US$53.2m over the last 12 months – this includes both the current and long-term debt. At this current level of debt, EDRY’s cash and short-term investments stands at US$686.6k for investing into the business. On top of this, EDRY has generated US$2.7m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 5.1%, indicating that EDRY’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In EDRY’s case, it is able to generate 0.051x cash from its debt capital.
Can EDRY pay its short-term liabilities?
With current liabilities at US$19.2m, it appears that the company is not able to meet these obligations given the level of current assets of US$9.5m, with a current ratio of 0.5x below the prudent level of 3x.
Does EDRY face the risk of succumbing to its debt-load?
With debt reaching 89.1% of equity, EDRY may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if EDRY’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 EDRY, the ratio of 1.26x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
EDRY’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 lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how EDRY has been performing in the past. I recommend you continue to research EuroDry to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EDRY’s future growth? Take a look at our free research report of analyst consensus for EDRY’s outlook.
- Historical Performance: What has EDRY’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.
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