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Itron, Inc. (NASDAQ:ITRI) is a small-cap stock with a market capitalization of US$2.4b. 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? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to 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. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into ITRI here.
Does ITRI Produce Much Cash Relative To Its Debt?
ITRI has sustained its debt level by about US$1.1b over the last 12 months including long-term debt. At this current level of debt, ITRI's cash and short-term investments stands at US$113m , ready to be used for running the business. Additionally, ITRI has produced cash from operations of US$159m over the same time period, leading to an operating cash to total debt ratio of 15%, meaning that ITRI’s operating cash is less than its debt.
Can ITRI pay its short-term liabilities?
At the current liabilities level of US$666m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.4x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Electronic companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can ITRI service its debt comfortably?
Since total debt levels exceed equity, ITRI 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. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In ITRI's case, the ratio of 2.68x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Although ITRI’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. 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 ITRI's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Itron to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ITRI’s future growth? Take a look at our free research report of analyst consensus for ITRI’s outlook.
- Valuation: What is ITRI 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 ITRI 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.