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EchoStar Corporation (NASDAQ:SATS) is a small-cap stock with a market capitalization of US$4.4b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Given that SATS is not presently profitable, it’s vital to assess 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, this is just a partial view of the stock, and I suggest you dig deeper yourself into SATS here.
Does SATS Produce Much Cash Relative To Its Debt?
SATS's debt level has been constant at around US$3.6b over the previous year including long-term debt. At this current level of debt, SATS's cash and short-term investments stands at US$3.3b to keep the business going. On top of this, SATS has generated US$775m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 21%, indicating that SATS’s operating cash is sufficient to cover its debt.
Can SATS pay its short-term liabilities?
At the current liabilities level of US$1.3b, the company has been able to meet these commitments with a current assets level of US$3.7b, leading to a 2.73x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Communications companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is SATS’s debt level acceptable?
With a debt-to-equity ratio of 84%, SATS can be considered as an above-average leveraged company. 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 SATS is currently unprofitable, 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 SATS’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 SATS'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 SATS has company-specific issues impacting its capital structure decisions. You should continue to research EchoStar to get a more holistic view of the small-cap by looking at: