While small-cap stocks, such as Cannindah Resources Limited (ASX:CAE) with its market cap of AUD $3.63M, 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. See our latest analysis for CAE
Does CAE generate an acceptable amount of cash through operations?
Unxpected adverse events, such as natural disasters and wars, can be a true test of a company’s capacity to meet its obligations. 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. CAE’s recent operating cash flow was -0.07 times its debt within the past year. This means what CAE can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at CAE’s operations at this point in time.
Can CAE meet its short-term obligations with the cash in hand?
What about its other commitments such as payments to suppliers and salaries to its employees? During times of unfavourable events, CAE could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We test for CAE’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that CAE does not have enough liquid assets on hand to meet its upcoming liabilities. Though this is a common practice, since cash is better utilized invested in the business or returned to shareholders, it does raise some concerns for investors should adverse events arise.
Does CAE face the risk of succumbing to its debt-load?
Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. CAE’s debt-to-equity ratio exceeds 100%, which means that it is a highly leveraged company. This is not a problem if the company has consistently grown its profits. But during a business downturn, as liquidity may dry up, making it hard to operate.
Are you a shareholder? CAE’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, the company may struggle to meet its near term liabilities should an adverse event occur. Moving forward, its financial position may change. I suggest keeping on top of market expectations for CAE’s future growth on our free analysis platform.
Are you a potential investor? CAE’s large debt ratio on top of poor cash coverage in addition to low liquidity coverage of near-term commitments may not build the strongest investment case. But, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of CAE’s track record. I encourage you to continue your research by taking a look at CAE’s past performance analysis on our free platform to figure out CAE’s financial health position.