How Financially Strong Is Erin Ventures Inc (TSXV:EV)?
While small-cap stocks, such as Erin Ventures Inc (TSXV:EV) with its market cap of CAD CA$3.85M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge. Check out our latest analysis for Erin Ventures
Does EV generate enough cash through operations?
Unxpected adverse events, such as natural disasters and wars, can be a true test of a company’s capacity to meet its obligations. Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future. Can EV pay off what it owes to its debtholder by using only cash from its operational activities? EV’s recent operating cash flow was -1.48 times its debt within the past year. This means what EV can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at EV’s operations at this point in time.
Does EV’s liquid assets cover its short-term commitments?
What about its commitments to other stakeholders such as payments to suppliers and employees? In times of adverse events, EV may need to liquidate its short-term assets to pay these immediate obligations. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that EV is unable to meet all of its upcoming commitments with its cash and other short-term assets. While this is not abnormal for companies, as their cash is better invested in the business or returned to investors than lying around, it does bring about some concerns should any unfavourable circumstances arise.
Is EV’s level of debt at an acceptable level?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. EV’s debt-to-equity ratio stands at 7.66%, which indicates that the company faces low risk associated with debt.
Next Steps:
Are you a shareholder? EV’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Given that its financial position may change. I recommend keeping on top of market expectations for EV’s future growth on our free analysis platform.
Are you a potential investor? EV appears to have maintained a sensible level of debt, meaning there’s some room to take on more debt if needed. But its current cash flow coverage of existing debt, in addition to the low liquidity, is concerning. However, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of EV’s track record. You should continue your analysis by taking a look at EV’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
To help readers see pass 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.
