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Investors are always looking for growth in small-cap stocks like Entercom Communications Corp. (NYSE:ETM), with a market cap of US$849m. However, an important fact which most ignore is: how financially healthy is the business? Given that ETM is not presently profitable, it’s essential to evaluate 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. However, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into ETM here.
Does ETM Produce Much Cash Relative To Its Debt?
ETM's debt levels surged from US$1.9b to US$2.0b over the last 12 months – this includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$68m to keep the business going. Additionally, ETM has generated cash from operations of US$102m over the same time period, resulting in an operating cash to total debt ratio of 5.1%, signalling that ETM’s debt is not covered by operating cash.
Does ETM’s liquid assets cover its short-term commitments?
Looking at ETM’s US$202m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$372m, leading to a 1.85x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Media 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.
Can ETM service its debt comfortably?
With total debt exceeding equity, ETM is considered a highly levered company. 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 ETM is currently loss-making, 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.
ETM’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 ETM's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Entercom Communications to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ETM’s future growth? Take a look at our free research report of analyst consensus for ETM’s outlook.
- Valuation: What is ETM 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 ETM 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.