Does IES Holdings Inc’s (IESC) Debt Level Pose A Serious Problem?

While small-cap stocks, such as IES Holdings Inc ( NASDAQ:IESC ) with its market cap of USD $399.45M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Why is it important? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. Thus, it becomes utmost important for an investor to test a company's resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. View our latest analysis for IES Holdings

Does IESC generate enough cash through operations?

While failure to manage cash has been one of the major reasons behind the demise of a lot of small businesses, mismanagement comes into the light during tough situations such as an economic recession. These catastrophes does not mean the company can stop servicing its debt obligations. We can test the impact of these adverse events by looking at whether cash from its current operations can pay back its current debt obligations. In the case of IESC, operating cash flow turned out to be 0.72x its debt level over the past twelve months. A ratio of over 0.5x is a positive sign and shows that IESC is generating more than enough cash from its core business, which should increase its potential to pay back near-term debt.

Can IESC pay its short-term liabilities?

In addition to debtholders, a company must be able to pay its bills and salaries to keep the business running. As cash flow from operation is hindered by adverse events, IESC may need to liquidate its short-term assets to meet these upcoming payments. We should examine if the company's cash and short-term investment levels match its current liabilities. Our analysis shows that IESC is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company's business operations should any unfavourable circumstances arise.

Can IESC service its debt comfortably?

A substantially higher debt poses a significant threat to a company's profitability during a downturn. In the case of IESC, the debt-to-equity ratio is 12.44%, which indicates that its debt is at an acceptable level. We can test if IESC's debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings should cover interest by at least three times, therefore reducing concerns when profit is highly volatile. In IESC's case, its interest is excessively covered by its earnings as the ratio sits at 13.66x. This means lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.