While small-cap stocks, such as Xcel Brands Inc (NASDAQ:XELB) with its market cap of $55.37M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into XELB here.
Does XELB generate enough cash through operations?
XELB has shrunken its total debt levels in the last twelve months, from $41.0M to $31.9M , which comprises of short- and long-term debt. With this debt payback, XELB’s cash and short-term investments stands at $14.1M , ready to deploy into the business. Moreover, XELB has produced $7.9M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 0.25x, signalling that XELB’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In XELB’s case, it is able to generate 0.25x cash from its debt capital.
Can XELB meet its short-term obligations with the cash in hand?
With current liabilities at $10.4M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.11x. Generally, for media companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does XELB face the risk of succumbing to its debt-load?
XELB’s level of debt is appropriate relative to its total equity, at 23.10%. This range is considered safe as XELB is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if XELB’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 XELB, the ratio of 2.12x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Are you a shareholder? Although XELB’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that its financial position may be different. You should always be researching market expectations for XELB’s future growth on our free analysis platform.
Are you a potential investor? XELB’s low-debt position gives it headroom for future growth funding in the future. Furthermore, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. In order to build your confidence in the stock, you need to further analyse the company’s track record. You should continue your analysis by taking a look at XELB’s past performance analysis on our free platform to conclude on XELB’s financial health.
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.