How Financially Strong Is Ebiquity plc (LON:EBQ)?

Simply Wall St

Sun, Jun 23, 2019, 11:36 PM

Investors are always looking for growth in small-cap stocks like Ebiquity plc (LON:EBQ), with a market cap of UK£39m. However, an important fact which most ignore is: how financially healthy is the business? Given that EBQ is not presently profitable, it’s crucial to assess the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is just a partial view of the stock, and I recommend you dig deeper yourself into EBQ here.

Does EBQ Produce Much Cash Relative To Its Debt?

EBQ has built up its total debt levels in the last twelve months, from UK£34m to UK£36m , which includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at UK£8.8m to keep the business going. Additionally, 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 current level of operating cash is not high enough to cover debt.

Can EBQ meet its short-term obligations with the cash in hand?

At the current liabilities level of UK£28m, it seems that the business 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 the number you get when you divide current assets by current liabilities. 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.

Can EBQ service its debt comfortably?

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. However, 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:

EBQ’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 EBQ'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 EBQ has company-specific issues impacting its capital structure decisions. You should continue to research Ebiquity to get a more holistic view of the small-cap by looking at: