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While small-cap stocks, such as Element Solutions Inc (NYSE:ESI) with its market cap of US$2.7b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since ESI is loss-making right now, it’s vital to assess the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into ESI here.
ESI’s Debt (And Cash Flows)
Over the past year, ESI has reduced its debt from US$5.6b to US$1.7b , which also accounts for long term debt. With this debt repayment, the current cash and short-term investment levels stands at US$230m to keep the business going. On top of this, ESI has produced cash from operations of US$4.5m over the same time period, resulting in an operating cash to total debt ratio of 0.3%, signalling that ESI’s debt is not covered by operating cash.
Does ESI’s liquid assets cover its short-term commitments?
Looking at ESI’s US$456m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.2x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Chemicals companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does ESI face the risk of succumbing to its debt-load?
ESI is a relatively highly levered company with a debt-to-equity of 73%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. Though, since ESI is presently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
ESI’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. 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 ESI's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Element Solutions to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ESI’s future growth? Take a look at our free research report of analyst consensus for ESI’s outlook.
- Valuation: What is ESI 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 ESI 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.