Ztest Electronics ($ZTE.C) From the Archives
3.25 / 5 stars * Originally published March 7, 2024
First look, requested via email to thewolf@wolfofoakville.com by Pete, a couple of weeks back. I must admit that the first glance caught my eye given the $6M market cap and seemingly great performance. Will the deep dive live up to my first look?
Balance Sheet:
Pretty solid current ratio out of the gates of 1.9 that consists of $621k in cash, $1.1M in accounts receivables and $1.9M worth of inventory against $1.9M liabilities due in the next year with only $89k of long term debt related to a CEBA loan. They also have access to a $1M LOC with TD with nothing currently drawn against. Pretty good start here. The inventory makes up more than half of their current assets which feels high given their current volume and sadly do not provide any aging for their accounts receivable.
Cash Flow:
Through six months have generated $662k in operational cash flow, almost all of it occurring during the most recent quarter. That's more than 5x greater than where they were a year ago. After paying off their previously mentioned LOC, payments on their small long term debt and lease obligations, ended the first half of the year with 167% more cash than they started the year with. $6M market cap you say - I'm still waiting for the shoe to drop.
Share Capital:
31.1M shares outstanding so a surprisingly small float
4.5M of dilution occurring this year to settle debt
1.1M options outstanding, all ITM and not expiring until 2027
Unfortunately, I see here that we have a 20% option plan. This will always keep me on the sidelines as a long term investor but I will say they have barely rewarded themselves with much share based comp within the last two and a half years. (Tip: Kill this at your next annual meeting and go to a 10% plan and I'll trust you more)
Simply Wall Street claims insider ownership of 30%, with 5% private company ownership (Conversance Inc) and 2% tutes
CEO, Steve Smith (I'm assuming not the former NFL wide receiver) has been selling in the open market. One or two sales before Christmas isn't going to raise my eyebrow, but it's continued into 2024. I also see that he was paid 2.875M shares for compensation for services at the end of last year, so now it makes a little more sense even though he sold at a much discounted SP compared to where the stock sits today. It looks like maybe he wasn't being paid for sometime and this was done to clean up the payables. IDK, now that your CF+ Steve maybe you can take home an actual paycheck.
Income Statement:
Revenue for their Q2 was $2.46M, up 115% from last year and through two quarters stand at $4.34M, up 88% from their mid point of last year. Gross margin is substantially better than a year ago, at 39.6% vs 22.3% in the quarter and 37.4% vs 24.6% through six months. An incredible leap putting 185% more on the GP dollar line with an 88% revenue increase. They also run the business very lean with SG&A expenses at 18.8% of revenues YTD and only 17.3% in the quarter. All of this translates to a very healthy $676K in net income which is 15.5% of revenues.
Overall:
Ok, you have my attention at a $6.5M market cap. This latest quarter trends out to $10M annually so under 1 MC to sales ratio and somewhere in the neighborhood of 4 EV/EBITDA on their YTD trend. Sexy, and in the AI space as well. Clearly some further due diligence is in order here, including their subsidiary Permatech, and their 25% stake in pre revenue Canadian tech company, Conversance (valued at $1).
Unfortunately, trying to do additional due diligence last night with the TSA crew proved mostly unfruitful with an aging, un-updated website, and no investor deck. Good news is the CEO reached out to me last night and said he would have an investor deck this weekend.
3.25 cautious initial stars with the ability to upgrade real quick if this performance trends.
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My intent is for my reviews to be a bolt on to due diligence that you have already completed. I receive dozens of review requests a week, therefore my own DD may be great or none whatsoever. Unless otherwise stated or implied, my opinions are on the financial performance of the company based on their most recent filings. I conduct these reviews to assist other retail investors whose research skills are limited when it comes to reviewing financial statements. I do not accept compensation of any kind from companies I review.
Wolf FINS Reviews are intended to be informational and are based on personal opinion. They are not intended to be financial advice, and all readers are encouraged to perform their own due diligence prior to their investment decisions, including discussions with their investment advisor.