While small-cap stocks, such as Ellex Medical Lasers Limited (ASX:ELX) with its market cap of AU$92m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Medical Equipment industry, especially ones that are currently loss-making, tend to be high risk. So, understanding the company’s financial health becomes essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into ELX here.
How does ELX’s operating cash flow stack up against its debt?
ELX has sustained its debt level by about AU$15m over the last 12 months made up of current and long term debt. At this constant level of debt, the current cash and short-term investment levels stands at AU$23m for investing into the business. Additionally, ELX has produced AU$522k in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 3.5%, meaning that ELX’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable companies since metrics such as return on asset (ROA) requires a positive net income. In ELX’s case, it is able to generate 0.035x cash from its debt capital.
Does ELX’s liquid assets cover its short-term commitments?
With current liabilities at AU$20m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.09x. However, a ratio greater than 3x may be considered as quite high.
Can ELX service its debt comfortably?
With a debt-to-equity ratio of 20%, ELX’s debt level may be seen as prudent. ELX is not taking on too much debt commitment, which may be constraining for future growth. ELX’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
Next Steps:
Although ELX’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. I admit this is a fairly basic analysis for ELX’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Ellex Medical Lasers to get a more holistic view of the stock by looking at: