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Investors are always looking for growth in small-cap stocks like Energy Recovery, Inc. (NASDAQ:ERII), with a market cap of US$427m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into ERII here.
How does ERII’s operating cash flow stack up against its debt?
ERII has built up its total debt levels in the last twelve months, from US$30k to US$14m – this includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$99m , ready to deploy into the business. Additionally, ERII has generated cash from operations of US$15m in the last twelve months, resulting in an operating cash to total debt ratio of 109%, indicating that ERII’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In ERII’s case, it is able to generate 1.09x cash from its debt capital.
Does ERII’s liquid assets cover its short-term commitments?
With current liabilities at US$28m, it seems that the business has been able to meet these commitments with a current assets level of US$119m, leading to a 4.22x current account ratio. Having said that, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
Can ERII service its debt comfortably?
With a debt-to-equity ratio of 12%, ERII’s debt level may be seen as prudent. ERII is not taking on too much debt commitment, which may be constraining for future growth.
ERII’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure ERII has company-specific issues impacting its capital structure decisions. You should continue to research Energy Recovery to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ERII’s future growth? Take a look at our free research report of analyst consensus for ERII’s outlook.
- Valuation: What is ERII 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 ERII 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.
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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.