Investors are always looking for growth in small-cap stocks like Itron, Inc. (NASDAQ:ITRI), with a market cap of US$2.0b. However, an important fact which most ignore is: how financially healthy is the business? Electronic companies, especially ones that are currently loss-making, tend to be high risk. Assessing first and foremost the financial health is vital. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into ITRI here.
How much cash does ITRI generate through its operations?
ITRI’s debt levels surged from US$322m to US$1.0b over the last 12 months – this includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$112m for investing into the business. Moreover, ITRI has produced cash from operations of US$144m during the same period of time, leading to an operating cash to total debt ratio of 14%, signalling that ITRI’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires positive earnings. In ITRI’s case, it is able to generate 0.14x cash from its debt capital.
Can ITRI meet its short-term obligations with the cash in hand?
Looking at ITRI’s US$616m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$868m, leading to a 1.41x current account ratio. Generally, for Electronic companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is ITRI’s debt level acceptable?
Since total debt levels have outpaced equities, ITRI is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since ITRI is presently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Although ITRI’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. I admit this is a fairly basic analysis for ITRI’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Itron to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ITRI’s future growth? Take a look at our free research report of analyst consensus for ITRI’s outlook.
- Valuation: What is ITRI 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 ITRI 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.