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Are El Paso Electric Company's (NYSE:EE) Interest Costs Too High?

El Paso Electric Company (NYSE:EE) is a small-cap stock with a market capitalization of US$2.4b. 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. Moreover, EE has produced cash from operations of US$286m in the last twelve months, resulting in an operating cash to total debt ratio of 19%, signalling that EE’s debt is not covered by operating cash. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For EE, the ratio of 3.4x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving EE ample headroom to grow its debt facilities. Next Steps:. Although EE’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap.

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