ExlService Holdings, Inc. (NASDAQ:EXLS) is a small-cap stock with a market capitalization of US$2.0b. 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? Companies operating in the IT industry, even ones that are profitable, are inclined towards being higher risk. So, understanding the company’s financial health becomes essential. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into EXLS here.
How does EXLS’s operating cash flow stack up against its debt?
EXLS’s debt levels surged from US$45m to US$301m over the last 12 months , which accounts for long term debt. With this increase in debt, EXLS currently has US$243m remaining in cash and short-term investments for investing into the business. On top of this, EXLS has produced cash from operations of US$90m during the same period of time, leading to an operating cash to total debt ratio of 30%, signalling that EXLS’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 EXLS’s case, it is able to generate 0.3x cash from its debt capital.
Can EXLS meet its short-term obligations with the cash in hand?
Looking at EXLS’s US$138m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.28x. 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 EXLS service its debt comfortably?
With a debt-to-equity ratio of 52%, EXLS can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if EXLS’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For EXLS, the ratio of 26.07x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving EXLS ample headroom to grow its debt facilities.
Although EXLS’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. This is only a rough assessment of financial health, and I’m sure EXLS has company-specific issues impacting its capital structure decisions. You should continue to research ExlService Holdings to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for EXLS’s future growth? Take a look at our free research report of analyst consensus for EXLS’s outlook.
- Valuation: What is EXLS 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 EXLS 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.
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.