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While small-cap stocks, such as Crowd Media Holdings Limited (ASX:CM8) with its market cap of AU$7.0m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that CM8 is not presently profitable, it’s crucial to understand 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 recommend you dig deeper yourself into CM8 here.
Does CM8 produce enough cash relative to debt?
CM8’s debt levels have fallen from AU$8.0m to AU$3.3m over the last 12 months , which is mainly comprised of near term debt. With this debt repayment, CM8’s cash and short-term investments stands at AU$2.6m for investing into the business. Additionally, CM8 has generated AU$2.6m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 80%, meaning that CM8’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires a positive net income. In CM8’s case, it is able to generate 0.8x cash from its debt capital.
Can CM8 meet its short-term obligations with the cash in hand?
At the current liabilities level of AU$8.3m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.36x. For Media companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can CM8 service its debt comfortably?
CM8 is a relatively highly levered company with a debt-to-equity of 71%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since CM8 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:
CM8’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around CM8’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure CM8 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Crowd Media Holdings to get a better picture of the small-cap by looking at:
- Valuation: What is CM8 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CM8 is currently mispriced by the market.
- Historical Performance: What has CM8’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.
- 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. On rare occasion, data errors may occur. Thank you for reading.