While small-cap stocks, such as Capital Product Partners LP (NASDAQ:CPLP) with its market cap of USD $415.05M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the oil, gas and consumable fuels industry, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes crucial. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into CPLP here.
Does CPLP generate enough cash through operations?
CPLP has built up its total debt levels in the last twelve months, from $568M to $602M – this includes both the current and long-term debt. With this rise in debt, CPLP’s cash and short-term investments stands at $107M for investing into the business. On top of this, CPLP has produced $155M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 0.26x, indicating that CPLP’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CPLP’s case, it is able to generate 0.26x cash from its debt capital.
Can CPLP pay its short-term liabilities?
Looking at CPLP’s most recent $92M liabilities, it appears that the company has been able to meet these commitments with a current assets level of $118M, leading to a 1.28x current account ratio. Generally, for oil, gas and consumable fuels companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does CPLP face the risk of succumbing to its debt-load?With debt reaching 62.45% of equity, CPLP may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether CPLP is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interets and tax (EBIT) at least three times its net interest payments is considered financially sound. In CPLP’s, case, the ratio of 2.87x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as CPLP’s low interest coverage already puts the company at higher risk of default.
Are you a shareholder? CPLP’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Given that CPLP’s financial situation may change. I recommend researching market expectations for CPLP’s future growth on our free analysis platform.
Are you a potential investor? CPLP’s large debt ratio along with low cash coverage of debt in addition to low liquidity coverage of short-term expenses may scare some investors away intially. But, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of CPLP’s track record. You should continue your analysis by taking a look at CPLP’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.