Cedar Woods Properties Limited (ASX:CWP) is a small-cap company – a market capitalization of less than $2 billion. Such companies have the highest growth potential, primarily due to their small-size. But that also makes them less diversified and susceptible to a downturn in the broader economy or the specific industry in the region. While CWP sports a low-debt on its balance sheet with the debt-to-equity ratio of 17.2%, more metrics should be looked at before you can decide whether it’s financially strong.
Primarily due to the lack of diversification in revenues geographically, often investors opt for a bundle of small-caps. On the other hand, well-versed investors allocate a small part of their portfolio capital to individual small-caps, primarily to improve its risk-return profile. However, that doesn’t reduce the risks these companies face individually. But I believe that it can be reduced to some extent by looking at these back of the hand balance sheet calculations. View our latest analysis for Cedar Woods Properties
How does Cedar Woods Properties’s operating cash flow stack against its overall debt?
Apart from a low-debt load, another highly important financial-check is whether the company can cover its operating expenses and generate enough cash to fund growth after paying interest on its debt. Strong, and positive, operating cash flow indicates that the company is profitable in its core activity. However, if the company is growing exceptionally fast, it’s acceptable that it depends on external sources of funding even to operate. Cedar Woods Properties’s operating cash flow to overall debt ratio stands at 7.5%. A ratio below 10% raises red flags as the company generates a marginal amount of additional cash after accounting for its operating expenses. While it’s hardly capable of funding growth on its own, it may have a hard time servicing its debt without external funding if it goes through a rough-patch.
Does CWP earn enough to service its debts?
Companies invest substantially in acquiring assets. Non-cash expenses such as depreciation and amortization represent ongoing expenses and losses on that front. Thus, it makes the company’s net income an important metric to decide whether the firm is generating economic profits. If earnings measure up strongly against the debt, it’s a sign of financial strength . A ratio of earnings versus interest payments above 5x is an indication of strong financial position. In CWP’s case the interest on debt is well covered by earnings (16.8x coverage).
Cedar Woods Properties fails to impress in terms of its operating cash flows compared to its overall-debt. However, the company does well on the earnings to interest-costs ratio. It appears CWP needs to increase the operational efficiency to be categorized as a financially healthy company. Now when you know whether you should keep the debt in mind as a risk factor when putting together your investment thesis, I recommend you check out our latest free analysis report on Cedar Woods Properties to see what are CWP’s growth prospects and whether it could be considered an undervalued opportunity.
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