Investors are always looking for growth in small-cap stocks like The Eastern Company (NASDAQ:EML), with a market cap of US$171m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into EML here.
How much cash does EML generate through its operations?
Over the past year, EML has reduced its debt from US$36m to US$29m , which also accounts for long term debt. With this debt repayment, EML’s cash and short-term investments stands at US$11m for investing into the business. On top of this, EML has generated cash from operations of US$8.1m during the same period of time, leading to an operating cash to total debt ratio of 28%, meaning that EML’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In EML’s case, it is able to generate 0.28x cash from its debt capital.
Can EML meet its short-term obligations with the cash in hand?
At the current liabilities level of US$30m, it appears that the company has been able to meet these commitments with a current assets level of US$97m, leading to a 3.26x current account ratio. Having said that, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Is EML’s debt level acceptable?
With a debt-to-equity ratio of 31%, EML’s debt level may be seen as prudent. This range is considered safe as EML is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if EML’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 EML, the ratio of 15.95x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving EML ample headroom to grow its debt facilities.
EML’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for EML’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Eastern to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EML’s future growth? Take a look at our free research report of analyst consensus for EML’s outlook.
- Valuation: What is EML 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 EML 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 firstname.lastname@example.org.