What You Must Know About Echo Energy plc’s (LON:ECHO) Financial Strength
Investors are always looking for growth in small-cap stocks like Echo Energy plc (AIM:ECHO), with a market cap of UK£53.63M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Oil and Gas industry, in particular ones that run negative earnings, tend to be high risk. So, understanding the company’s financial health becomes vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into ECHO here.
Does ECHO generate enough cash through operations?
In the most recent balance sheet, ECHO has borrowed debt capital of around UK£10.25M – this includes both the current and long-term debt. With this increase in debt, ECHO currently has UK£184.85K remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of ECHO’s operating efficiency ratios such as ROA here.
Can ECHO pay its short-term liabilities?
With current liabilities at UK£429.35K, it appears that the company has been able to meet these obligations given the level of current assets of UK£506.75K, with a current ratio of 1.18x. For Oil and Gas companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is ECHO’s debt level acceptable?
With a debt-to-equity ratio of 66.30%, ECHO can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since ECHO 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.
Next Steps:
At its current level of cash flow coverage, ECHO has room for improvement to better cushion for events which may require debt repayment. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how ECHO has been performing in the past. I suggest you continue to research Echo Energy to get a more holistic view of the stock by looking at:
1. Historical Performance: What has ECHO’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
2. 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.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
