Is CIBT Education Group Inc.'s (TSE:MBA) Balance Sheet A Threat To Its Future?

CIBT Education Group Inc. (TSE:MBA) is a small-cap stock with a market capitalization of CA$57m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into MBA here.

How does MBA’s operating cash flow stack up against its debt?

MBA has built up its total debt levels in the last twelve months, from CA$72m to CA$110m , which accounts for long term debt. With this growth in debt, MBA's cash and short-term investments stands at CA$19m for investing into the business. Additionally, MBA has generated CA$21m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 19%, indicating that MBA’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 MBA’s case, it is able to generate 0.19x cash from its debt capital.

Does MBA’s liquid assets cover its short-term commitments?

With current liabilities at CA$88m, it seems that the business may not be able to easily meet these obligations given the level of current assets of CA$36m, with a current ratio of 0.41x.

Does MBA face the risk of succumbing to its debt-load?

MBA is a relatively highly levered company with a debt-to-equity of 66%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In MBA's case, the ratio of 3.58x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving MBA ample headroom to grow its debt facilities.

Next Steps:

Although MBA’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for MBA's financial health. Other important fundamentals need to be considered alongside. You should continue to research CIBT Education Group to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for MBA’s future growth? Take a look at our free research report of analyst consensus for MBA’s outlook.
2. Valuation: What is MBA 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 MBA is currently mispriced by the market.
3. 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. Thank you for reading.