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Investors are always looking for growth in small-cap stocks like ZAGG Inc (NASDAQ:ZAGG), with a market cap of US$210m. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company's financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, this is just a partial view of the stock, and I suggest you dig deeper yourself into ZAGG here.
ZAGG’s Debt (And Cash Flows)
ZAGG's debt levels surged from US$22m to US$108m over the last 12 months – this includes long-term debt. With this increase in debt, ZAGG currently has US$15m remaining in cash and short-term investments to keep the business going. Additionally, ZAGG has generated US$4.0m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 3.7%, signalling that ZAGG’s current level of operating cash is not high enough to cover debt.
Does ZAGG’s liquid assets cover its short-term commitments?
With current liabilities at US$107m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.01x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Consumer Durables companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does ZAGG face the risk of succumbing to its debt-load?
ZAGG is a relatively highly levered company with a debt-to-equity of 60%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether ZAGG 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 ZAGG's, case, the ratio of 13.05x 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.
ZAGG’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around ZAGG's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure ZAGG has company-specific issues impacting its capital structure decisions. I recommend you continue to research ZAGG to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ZAGG’s future growth? Take a look at our free research report of analyst consensus for ZAGG’s outlook.
- Valuation: What is ZAGG 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 ZAGG 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.
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 firstname.lastname@example.org. 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.