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While small-cap stocks, such as Eagle Bulk Shipping Inc. (NASDAQ:EGLE) with its market cap of US$382m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is just a partial view of the stock, and I recommend you dig deeper yourself into EGLE here.
EGLE’s Debt (And Cash Flows)
EGLE has built up its total debt levels in the last twelve months, from US$321m to US$368m , which accounts for long term debt. With this growth in debt, EGLE's cash and short-term investments stands at US$61m to keep the business going. Additionally, EGLE has generated cash from operations of US$43m over the same time period, leading to an operating cash to total debt ratio of 12%, indicating that EGLE’s current level of operating cash is not high enough to cover debt.
Does EGLE’s liquid assets cover its short-term commitments?
Looking at EGLE’s US$77m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$100m, with a current ratio of 1.3x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Shipping companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can EGLE service its debt comfortably?
EGLE is a relatively highly levered company with a debt-to-equity of 71%. 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 EGLE 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 EGLE's, case, the ratio of 1.3x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Although EGLE’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 EGLE'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 EGLE has been performing in the past. I suggest you continue to research Eagle Bulk Shipping to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EGLE’s future growth? Take a look at our free research report of analyst consensus for EGLE’s outlook.
- Valuation: What is EGLE 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 EGLE 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 email@example.com. 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.