While small-cap stocks, such as EVI Industries, Inc. (NYSEMKT:EVI) with its market cap of US$434m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, potential investors would need to take a closer look, and I suggest you dig deeper yourself into EVI here.
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Does EVI Produce Much Cash Relative To Its Debt?
EVI's debt levels surged from US$22m to US$42m over the last 12 months , which accounts for long term debt. With this increase in debt, EVI currently has US$6.7m remaining in cash and short-term investments , ready to be used for running the business. Moreover, EVI has generated US$3.2m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 7.7%, signalling that EVI’s operating cash is less than its debt.
Can EVI pay its short-term liabilities?
With current liabilities at US$32m, the company has been able to meet these commitments with a current assets level of US$69m, leading to a 2.13x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Trade Distributors companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does EVI face the risk of succumbing to its debt-load?
EVI is a relatively highly levered company with a debt-to-equity of 55%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if EVI’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 EVI, the ratio of 5.93x suggests that interest is appropriately 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.
Although EVI’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I'm sure EVI has company-specific issues impacting its capital structure decisions. I suggest you continue to research EVI Industries to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EVI’s future growth? Take a look at our free research report of analyst consensus for EVI’s outlook.
- Valuation: What is EVI 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 EVI 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.
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