Yahoo Finance What does IDP Education Limited’s (ASX:IEL) Balance Sheet Tell Us About Its Future?
IDP Education Limited (ASX:IEL) is a small-cap stock with a market capitalization of AU$2.3b. 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? Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into IEL here.
How much cash does IEL generate through its operations?
Over the past year, IEL has ramped up its debt from AU$39m to AU$64m , which includes long-term debt. With this growth in debt, IEL’s cash and short-term investments stands at AU$49m for investing into the business. Moreover, IEL has generated cash from operations of AU$75m in the last twelve months, resulting in an operating cash to total debt ratio of 117%, indicating that IEL’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In IEL’s case, it is able to generate 1.17x cash from its debt capital.
Can IEL meet its short-term obligations with the cash in hand?
At the current liabilities level of AU$118m, the company has been able to meet these commitments with a current assets level of AU$119m, leading to a 1.02x current account ratio. Usually, for Consumer Services companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can IEL service its debt comfortably?
With debt reaching 63% of equity, IEL 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 check to see whether IEL 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 IEL’s, case, the ratio of 77.03x suggests that interest is comfortably 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:
IEL’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how IEL has been performing in the past. You should continue to research IDP Education to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for IEL’s future growth? Take a look at our free research report of analyst consensus for IEL’s outlook.
Valuation: What is IEL 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 IEL 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.
