While small-cap stocks, such as ZAGG Inc (NASDAQ:ZAGG) with its market cap of US$395m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Consumer Durables businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into ZAGG here.
Does ZAGG produce enough cash relative to debt?
ZAGG’s debt levels have fallen from US$48m to US$20m over the last 12 months – this includes both the current and long-term debt. With this debt repayment, the current cash and short-term investment levels stands at US$19m , ready to deploy into the business. On top of this, ZAGG has generated cash from operations of US$43m during the same period of time, leading to an operating cash to total debt ratio of 215%, signalling that ZAGG’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ZAGG’s case, it is able to generate 2.15x cash from its debt capital.
Does ZAGG’s liquid assets cover its short-term commitments?
With current liabilities at US$108m, the company has been able to meet these obligations given the level of current assets of US$179m, with a current ratio of 1.66x. Usually, for Consumer Durables companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does ZAGG face the risk of succumbing to its debt-load?
With debt at 15% of equity, ZAGG may be thought of as appropriately levered. ZAGG is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if ZAGG’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 ZAGG, the ratio of 28.76x suggests that interest is comfortably 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.
ZAGG has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure ZAGG has company-specific issues impacting its capital structure decisions. You should continue to research ZAGG to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ZAGG’s future growth? Take a look at our free research report of analyst consensus for ZAGG’s outlook.
- Valuation: What is ZAGG 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 ZAGG 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.