While small-cap stocks, such as Ceres Global Ag Corp. (TSE:CRP) with its market cap of CA$130m, 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 CRP is not presently profitable, it’s vital to evaluate the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company’s balance sheet strength. Nevertheless, potential investors would need to take a closer look, and I suggest you dig deeper yourself into CRP here.
CRP’s Debt (And Cash Flows)
CRP’s debt levels surged from US$40m to US$61m over the last 12 months , which includes long-term debt. With this growth in debt, CRP’s cash and short-term investments stands at US$1.9m to keep the business going. Moving on, operating cash flow was negative over the last twelve months. 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 CRP’s operating efficiency ratios such as ROA here.
Can CRP pay its short-term liabilities?
With current liabilities at US$70m, it appears that the company has been able to meet these commitments with a current assets level of US$108m, leading to a 1.54x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Commercial Services companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can CRP service its debt comfortably?
CRP is a relatively highly levered company with a debt-to-equity of 46%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. But since CRP is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
CRP’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for CRP’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Ceres Global Ag to get a more holistic view of the small-cap by looking at:
- Historical Performance: What has CRP’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.
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