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While small-cap stocks, such as US Ecology, Inc. (NASDAQ:ECOL) with its market cap of US$1.3b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, these checks don't give you a full picture, so I recommend you dig deeper yourself into ECOL here.
ECOL’s Debt (And Cash Flows)
ECOL's debt levels surged from US$277m to US$358m over the last 12 months , which accounts for long term debt. With this increase in debt, ECOL's cash and short-term investments stands at US$16m , ready to be used for running the business. Additionally, ECOL has produced US$71m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 20%, indicating that ECOL’s debt is not covered by operating cash.
Does ECOL’s liquid assets cover its short-term commitments?
Looking at ECOL’s US$77m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$164m, with a current ratio of 2.13x. The current ratio is calculated by dividing current assets by current liabilities. For Commercial Services companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Does ECOL face the risk of succumbing to its debt-load?
ECOL is a relatively highly levered company with a debt-to-equity of 93%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether ECOL is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In ECOL's, case, the ratio of 5.76x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as ECOL’s high interest coverage is seen as responsible and safe practice.
Although ECOL’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 ECOL has company-specific issues impacting its capital structure decisions. I suggest you continue to research US Ecology to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ECOL’s future growth? Take a look at our free research report of analyst consensus for ECOL’s outlook.
- Valuation: What is ECOL 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 ECOL 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.
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 email@example.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.