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Is Xcel Brands, Inc.'s (NASDAQ:XELB) Balance Sheet A Threat To Its Future?

Simply Wall St

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Xcel Brands, Inc. (NASDAQ:XELB) is a small-cap stock with a market capitalization of US$32m. 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? 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. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, these checks don't give you a full picture, so I recommend you dig deeper yourself into XELB here.

Does XELB Produce Much Cash Relative To Its Debt?

Over the past year, XELB has reduced its debt from US$25m to US$20m , which also accounts for long term debt. With this debt payback, the current cash and short-term investment levels stands at US$8.8m , ready to be used for running the business. Moreover, XELB has generated cash from operations of US$6.6m over the same time period, resulting in an operating cash to total debt ratio of 34%, meaning that XELB’s operating cash is sufficient to cover its debt.

Can XELB pay its short-term liabilities?

Looking at XELB’s US$16m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$24m, leading to a 1.48x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Media companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NasdaqGM:XELB Historical Debt, April 3rd 2019

Is XELB’s debt level acceptable?

XELB’s level of debt is appropriate relative to its total equity, at 20%. XELB is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether XELB 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 XELB's, case, the ratio of 4.68x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as XELB’s high interest coverage is seen as responsible and safe practice.

Next Steps:

XELB has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for XELB's financial health. Other important fundamentals need to be considered alongside. You should continue to research Xcel Brands to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for XELB’s future growth? Take a look at our free research report of analyst consensus for XELB’s outlook.
  2. Valuation: What is XELB 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 XELB is currently mispriced by the market.
  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.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.