While small-cap stocks, such as Cannindah Resources Limited (ASX:CAE) with its market cap of AU$5.78M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since CAE is loss-making right now, it’s vital to evaluate the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into CAE here.
Does CAE generate enough cash through operations?
CAE’s debt levels surged from AU$1.81M to AU$2.46M over the last 12 months , which is made up of current and long term debt. With this rise in debt, the current cash and short-term investment levels stands at AU$318.48K for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of CAE’s operating efficiency ratios such as ROA here.
Does CAE’s liquid assets cover its short-term commitments?
With current liabilities at AU$2.78M, it seems that the business is not able to meet these obligations given the level of current assets of AU$446.29K, with a current ratio of 0.16x below the prudent level of 3x.
Does CAE face the risk of succumbing to its debt-load?
CAE is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since CAE is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.Next Steps:
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, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for CAE’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Cannindah Resources to get a better picture of the stock by looking at:
- 1. Historical Performance: What has CAE’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 2. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.