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Entravision Communications Corporation (NYSE:EVC) is a small-cap stock with a market capitalization of US$330m. 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? Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I suggest you dig deeper yourself into EVC here.
How does EVC’s operating cash flow stack up against its debt?
EVC has sustained its debt level by about US$294m over the last 12 months including long-term debt. At this current level of debt, EVC’s cash and short-term investments stands at US$234m for investing into the business. Moreover, EVC has produced cash from operations of US$31m in the last twelve months, resulting in an operating cash to total debt ratio of 10%, indicating that EVC’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In EVC’s case, it is able to generate 0.1x cash from its debt capital.
Does EVC’s liquid assets cover its short-term commitments?
With current liabilities at US$60m, the company has been able to meet these obligations given the level of current assets of US$327m, with a current ratio of 5.44x. However, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Can EVC service its debt comfortably?
With debt reaching 88% of equity, EVC may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In EVC’s case, the ratio of 2.62x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
EVC’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for EVC’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Entravision Communications to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EVC’s future growth? Take a look at our free research report of analyst consensus for EVC’s outlook.
- Valuation: What is EVC 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 EVC 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.
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.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.