Are XP Power Limited’s (LON:XPP) Interest Costs Too High?
While small-cap stocks, such as XP Power Limited (LSE:XPP) with its market cap of UK£611.22M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into XPP here.
Does XPP generate an acceptable amount of cash through operations?
XPP’s debt levels have fallen from UK£8.60M to UK£5.50M over the last 12 months , which is made up of current and long term debt. With this debt repayment, the current cash and short-term investment levels stands at UK£9.20M for investing into the business. Moreover, XPP has generated cash from operations of UK£27.90M over the same time period, resulting in an operating cash to total debt ratio of 507.27%, signalling that XPP’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In XPP’s case, it is able to generate 5.07x cash from its debt capital.
Does XPP’s liquid assets cover its short-term commitments?
Looking at XPP’s most recent UK£25.80M liabilities, it appears that the company has been able to meet these commitments with a current assets level of UK£65.70M, leading to a 2.55x current account ratio. Usually, for Electrical companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does XPP face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 3.04%, XPP’s debt level is relatively low. This range is considered safe as XPP is not taking on too much debt obligation, which may be constraining for future growth. We can test if XPP’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 XPP, the ratio of 322x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
XPP 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 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 XPP has been performing in the past. I suggest you continue to research XP Power to get a more holistic view of the stock by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for XPP’s future growth? Take a look at our free research report of analyst consensus for XPP’s outlook.
2. Valuation: What is XPP 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 XPP 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.
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.
