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Are Etsy Inc’s (ETSY) Interest Costs Too High?

Investors are always looking for growth in small-cap stocks like Etsy Inc (NASDAQ:ETSY), with a market cap of USD $1.96B. However, an important fact which most ignore is: how financially healthy is the company? 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. These factors make a basic understanding of a company’s financial position of utmost importance for a potential investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. View our latest analysis for Etsy

NasdaqGS:ETSY Historical Debt Nov 6th 17

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. Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future. Fortunately, we can test the company’s capacity to pay back its debtholders without summoning any catastrophes by looking at how much cash it generates from its current operations. In the case of ETSY, operating cash flow over the past twelve months do cover its current debt, which indicates extremely low risk of ETSY not being able to meet its debt near-team, given that it generates enough cash in a year to pay off its current debt. This is great news for both debtholders and shareholders, as the company exhibits cautious cash and debt management.

What about its commitments to other stakeholders such as payments to suppliers and employees? During times of unfavourable events, ETSY could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We test for ETSY’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that ETSY 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.

A substantially higher debt poses a significant threat to a company’s profitability during a downturn. In the case of ETSY, the debt-to-equity ratio is 4.39%, which indicates that the company faces low risk associated with debt. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings at least three times its interest payments is considered financially sound. ETSY’s profits only covers interest 0.56 times, which is deemed as inadequate. Lenders may be more reluctant to lend out more funding as ETSY’s low interest coverage already puts the company at higher risk of default.

Are you a shareholder? ETSY has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Moving forward, its financial position may change. I suggest keeping on top of market expectations for ETSY’s future growth on our free analysis platform.

Are you a potential investor? Although ETSY’s debt level is relatively low, it has the ability to efficiently utilise its borrowings to generate ample cash flow coverage. Furthermore, its high liquidity means the company should continue to operate smoothly in the case of adverse events. In order to build your conviction in the stock, you need to further analyse the company’s track record. You should continue your analysis by taking a look at ETSY’s past performance analysis on our free platform to conclude on ETSY’s financial health.

To help readers see pass 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.