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What Investors Should Know About Equiniti Group plc's (LON:EQN) Financial Strength

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While small-cap stocks, such as Equiniti Group plc (LON:EQN) with its market cap of UK£793m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, these checks don't give you a full picture, so I recommend you dig deeper yourself into EQN here.

Does EQN Produce Much Cash Relative To Its Debt?

EQN's debt levels surged from UK£249m to UK£400m over the last 12 months – this includes long-term debt. With this increase in debt, EQN currently has UK£91m remaining in cash and short-term investments to keep the business going. Additionally, EQN has generated cash from operations of UK£92m during the same period of time, leading to an operating cash to total debt ratio of 23%, indicating that EQN’s debt is appropriately covered by operating cash.

Can EQN pay its short-term liabilities?

Looking at EQN’s UK£151m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of UK£215m, leading to a 1.43x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For IT companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

LSE:EQN Historical Debt, July 3rd 2019
LSE:EQN Historical Debt, July 3rd 2019

Does EQN face the risk of succumbing to its debt-load?

EQN is a relatively highly levered company with a debt-to-equity of 78%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if EQN’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For EQN, the ratio of 4.42x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

EQN’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 EQN's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for EQN's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Equiniti Group to get a better picture of the small-cap by looking at:

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  1. Valuation: What is EQN 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 EQN is currently mispriced by the market.

  2. Historical Performance: What has EQN'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.

  3. 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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.