Yahoo Finance How Financially Strong Is Elegant Hotels Group Plc (LON:EHG)?
While small-cap stocks, such as Elegant Hotels Group Plc (LON:EHG) with its market cap of UK£60m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into EHG here.
How much cash does EHG generate through its operations?
EHG’s debt levels surged from US$64m to US$74m over the last 12 months , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at US$2.1m , ready to deploy into the business. Moreover, EHG has produced US$13m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 18%, signalling that EHG’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In EHG’s case, it is able to generate 0.18x cash from its debt capital.
Can EHG pay its short-term liabilities?
At the current liabilities level of US$19m, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.73x.
Does EHG face the risk of succumbing to its debt-load?
EHG is a relatively highly levered company with a debt-to-equity of 64%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether EHG is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In EHG’s, case, the ratio of 4.02x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving EHG ample headroom to grow its debt facilities.
Next Steps:
EHG’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. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how EHG has been performing in the past. I recommend you continue to research Elegant Hotels Group to get a better picture of the stock by looking at:
Valuation: What is EHG worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether EHG is currently mispriced by the market.
Historical Performance: What has EHG’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
