Investors are always looking for growth in small-cap stocks like CanWel Building Materials Group Ltd (TSE:CWX), with a market cap of CA$362m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into CWX here.
How much cash does CWX generate through its operations?
CWX’s debt levels surged from CA$175m to CA$271m over the last 12 months – this includes long-term debt. With this rise in debt, CWX currently has CA$1.6m remaining in cash and short-term investments , ready to deploy into the business. Moreover, CWX has produced cash from operations of CA$13m in the last twelve months, leading to an operating cash to total debt ratio of 4.9%, signalling that CWX’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CWX’s case, it is able to generate 0.049x cash from its debt capital.
Can CWX pay its short-term liabilities?
With current liabilities at CA$145m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.8x. Usually, for Trade Distributors companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does CWX face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 74%, CWX can be considered as an above-average leveraged company. 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 CWX is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In CWX’s, case, the ratio of 5.56x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
Although CWX’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how CWX has been performing in the past. I suggest you continue to research CanWel Building Materials Group to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CWX’s future growth? Take a look at our free research report of analyst consensus for CWX’s outlook.
- Valuation: What is CWX 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 CWX is currently mispriced by the market.
- 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.