EnviroStar Inc (NYSEMKT:EVI) is a small-cap stock with a market capitalization of US$320m. 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. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into EVI here.
How much cash does EVI generate through its operations?
EVI has built up its total debt levels in the last twelve months, from US$4.9m to US$21m , which includes long-term debt. With this growth in debt, EVI currently has US$1.9m remaining in cash and short-term investments for investing into the business. Moreover, EVI has produced cash from operations of US$6.2m in the last twelve months, leading to an operating cash to total debt ratio of 29%, meaning that EVI’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In EVI’s case, it is able to generate 0.29x cash from its debt capital.
Can EVI pay its short-term liabilities?
At the current liabilities level of US$32m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.61x. Usually, for Trade Distributors companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can EVI service its debt comfortably?
With a debt-to-equity ratio of 31%, EVI’s debt level may be seen as prudent. EVI is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether EVI is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In EVI’s, case, the ratio of 11.9x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as EVI’s high interest coverage is seen as responsible and safe practice.
EVI has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, 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 EVI has been performing in the past. I recommend you continue to research EnviroStar to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EVI’s future growth? Take a look at our free research report of analyst consensus for EVI’s outlook.
- Historical Performance: What has EVI’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.
- 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 past 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. For errors that warrant correction please contact the editor at email@example.com.