xG Technology Inc (NASDAQ:XGTI) is a small-cap stock with a market capitalization of US$14.01M. 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? Communications companies, in particular ones that run negative earnings, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is vital. 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 suggest you dig deeper yourself into XGTI here.
Does XGTI generate an acceptable amount of cash through operations?
XGTI’s debt level has been constant at around US$2.05M over the previous year – this includes both the current and long-term debt. At this constant level of debt, XGTI’s cash and short-term investments stands at US$2.80M , 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. For this article’s sake, I won’t be looking at this today, but you can take a look at some of XGTI’s operating efficiency ratios such as ROA here.
Can XGTI pay its short-term liabilities?
With current liabilities at US$18.99M, it appears that the company has been able to meet these commitments with a current assets level of US$26.52M, leading to a 1.4x current account ratio. For Communications companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Is XGTI’s debt level acceptable?
With a debt-to-equity ratio of 11.62%, XGTI’s debt level may be seen as prudent. This range is considered safe as XGTI is not taking on too much debt obligation, which may be constraining for future growth. Risk around debt is very low for XGTI, and the company also has the ability and headroom to increase debt if needed going forward.
XGTI’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure XGTI has company-specific issues impacting its capital structure decisions. You should continue to research xG Technology to get a more holistic view of the stock by looking at:
- Historical Performance: What has XGTI’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 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.