In This Article:
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
While small-cap stocks, such as Ebiquity plc (LON:EBQ) with its market cap of UK£39m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since EBQ is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, these checks don't give you a full picture, so I suggest you dig deeper yourself into EBQ here.
EBQ’s Debt (And Cash Flows)
EBQ's debt levels surged from UK£34m to UK£36m over the last 12 months – this includes long-term debt. With this increase in debt, EBQ currently has UK£8.8m remaining in cash and short-term investments to keep the business going. Moreover, EBQ has produced cash from operations of UK£4.6m in the last twelve months, resulting in an operating cash to total debt ratio of 13%, signalling that EBQ’s debt is not covered by operating cash.
Does EBQ’s liquid assets cover its short-term commitments?
With current liabilities at UK£28m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.39x. The current ratio is calculated by dividing current assets by current liabilities. For Media companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does EBQ face the risk of succumbing to its debt-load?
With debt reaching 76% of equity, EBQ may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. Though, since EBQ is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Although EBQ’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around EBQ's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for EBQ's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Ebiquity to get a better picture of the small-cap by looking at: