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While small-cap stocks, such as Eden Innovations Ltd (ASX:EDE) with its market cap of AU$164.11M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Oil and Gas companies, especially ones that are currently loss-making, tend to be high risk. Evaluating financial health as part of your investment thesis is vital. 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 EDE here.
How does EDE’s operating cash flow stack up against its debt?
Over the past year, EDE has borrowed debt capital of around AU$1.37M made up of current and long term debt. With this growth in debt, the current cash and short-term investment levels stands at AU$7.98M for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of EDE’s operating efficiency ratios such as ROA here.
Can EDE meet its short-term obligations with the cash in hand?
With current liabilities at AU$2.26M, it seems that the business has been able to meet these commitments with a current assets level of AU$8.81M, leading to a 3.89x current account ratio. Though, anything about 3x may be excessive, since EDE may be leaving too much capital in low-earning investments.
Does EDE face the risk of succumbing to its debt-load?
With debt at 7.01% of equity, EDE may be thought of as having low leverage. This range is considered safe as EDE is not taking on too much debt obligation, which may be constraining for future growth. EDE’s risk around capital structure is almost non-existent, and the company has the headroom and ability to raise debt should it need to in the future.
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EDE’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for EDE’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Eden Innovations to get a more holistic view of the stock by looking at: