Yahoo Finance What You Must Know About Enerflex Ltd’s (TSE:EFX) Financial Strength
Enerflex Ltd (TSE:EFX) is a small-cap stock with a market capitalization of CA$1.4b. 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? Energy Services companies, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is crucial. 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 suggest you dig deeper yourself into EFX here.
How much cash does EFX generate through its operations?
Over the past year, EFX has ramped up its debt from CA$352m to CA$485m , which is made up of current and long term debt. With this growth in debt, the current cash and short-term investment levels stands at CA$306m for investing into the business. Additionally, EFX has produced cash from operations of CA$214m over the same time period, resulting in an operating cash to total debt ratio of 44%, indicating that EFX’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In EFX’s case, it is able to generate 0.44x cash from its debt capital.
Can EFX pay its short-term liabilities?
At the current liabilities level of CA$412m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of CA$870m, with a current ratio of 2.11x. Usually, for Energy Services companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is EFX’s debt level acceptable?
With debt reaching 41% of equity, EFX may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if EFX’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 EFX, the ratio of 6.66x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as EFX’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although EFX’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for EFX’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Enerflex to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for EFX’s future growth? Take a look at our free research report of analyst consensus for EFX’s outlook.
Valuation: What is EFX 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 EFX is currently mispriced by the market.
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.
