Investors are always looking for growth in small-cap stocks like Ebix, Inc. (NASDAQ:EBIX), with a market cap of US$1.5b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, 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, this is not a comprehensive overview, so I suggest you dig deeper yourself into EBIX here.
Does EBIX Produce Much Cash Relative To Its Debt?
EBIX's debt levels surged from US$409m to US$736m over the last 12 months – this includes long-term debt. With this growth in debt, EBIX currently has US$179m remaining in cash and short-term investments , ready to be used for running the business. Moreover, EBIX has generated US$90m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 12%, indicating that EBIX’s current level of operating cash is not high enough to cover debt.
Does EBIX’s liquid assets cover its short-term commitments?
At the current liabilities level of US$317m, the company has been able to meet these commitments with a current assets level of US$427m, leading to a 1.35x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Software companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does EBIX face the risk of succumbing to its debt-load?
EBIX is a highly-leveraged company with debt exceeding equity by over 100%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether EBIX 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 EBIX's, case, the ratio of 5.68x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as EBIX’s high interest coverage is seen as responsible and safe practice.
Although EBIX’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. Since there is also no concerns around EBIX's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how EBIX has been performing in the past. I suggest you continue to research Ebix to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EBIX’s future growth? Take a look at our free research report of analyst consensus for EBIX’s outlook.
- Valuation: What is EBIX 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 EBIX 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.
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