CRH Medical Corporation (TSE:CRH) is a small-cap stock with a market capitalization of US$312.50m. 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? Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into CRH here.
Does CRH produce enough cash relative to debt?
CRH’s debt levels surged from US$48.47m to US$59.67m over the last 12 months , which comprises of short- and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$4.83m , ready to deploy into the business. Additionally, CRH has produced US$43.41m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 72.75%, indicating that CRH’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CRH’s case, it is able to generate 0.73x cash from its debt capital.
Can CRH pay its short-term liabilities?
At the current liabilities level of US$8.82m liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.29x. Generally, for General companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does CRH face the risk of succumbing to its debt-load?With debt reaching 49.05% of equity, CRH may be thought of as relatively highly levered. 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 CRH 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 CRH’s, case, the ratio of 6.91x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as CRH’s high interest coverage is seen as responsible and safe practice.
Although CRH’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. Since there is also no concerns around CRH’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for CRH’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research CRH Medical to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CRH’s future growth? Take a look at our free research report of analyst consensus for CRH’s outlook.
- Valuation: What is CRH 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 CRH 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 firstname.lastname@example.org.