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Ero Copper Corp. (TSE:ERO) is a small-cap stock with a market capitalization of CA$1.7b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, this is not a comprehensive overview, so I recommend you dig deeper yourself into ERO here.
Does ERO Produce Much Cash Relative To Its Debt?
ERO has built up its total debt levels in the last twelve months, from US$140m to US$160m – this includes long-term debt. With this increase in debt, ERO currently has US$19m remaining in cash and short-term investments to keep the business going. On top of this, ERO has produced cash from operations of US$105m in the last twelve months, leading to an operating cash to total debt ratio of 66%, signalling that ERO’s debt is appropriately covered by operating cash.
Can ERO pay its short-term liabilities?
With current liabilities at US$68m, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.99x. The current ratio is calculated by dividing current assets by current liabilities.
Can ERO service its debt comfortably?
Since total debt levels exceed equity, ERO is a highly leveraged company. 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 test if ERO’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 ERO, the ratio of 5.08x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving ERO ample headroom to grow its debt facilities.
ERO’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I'm sure ERO has company-specific issues impacting its capital structure decisions. I suggest you continue to research Ero Copper to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ERO’s future growth? Take a look at our free research report of analyst consensus for ERO’s outlook.
- Valuation: What is ERO 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 ERO 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 firstname.lastname@example.org. 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.