Stock Analysis

How Financially Strong Is Chartwell Retirement Residences (TSE:CSH.UN)?

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Stocks with market capitalization between $2B and $10B, such as Chartwell Retirement Residences (TSE:CSH.UN) with a size of CA$3.26b, do not attract as much attention from the investing community as do the small-caps and large-caps. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. CSH.UN’s financial liquidity and debt position will be analysed in this article, to get an idea of whether the company can fund opportunities for strategic growth and maintain strength through economic downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into CSH.UN here. Check out our latest analysis for Chartwell Retirement Residences

How much cash does CSH.UN generate through its operations?

Over the past year, CSH.UN has maintained its debt levels at around CA$1.81b – this includes both the current and long-term debt. At this current level of debt, CSH.UN's cash and short-term investments stands at CA$47.21m , ready to deploy into the business. On top of this, CSH.UN has generated cash from operations of CA$181.96m during the same period of time, resulting in an operating cash to total debt ratio of 10.04%, signalling that CSH.UN’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CSH.UN’s case, it is able to generate 0.1x cash from its debt capital.

Can CSH.UN meet its short-term obligations with the cash in hand?

Looking at CSH.UN’s most recent CA$327.89m liabilities, it seems that the business is not able to meet these obligations given the level of current assets of CA$97.55m, with a current ratio of 0.3x below the prudent level of 3x.

TSX:CSH.UN Historical Debt June 27th 18
TSX:CSH.UN Historical Debt June 27th 18

Does CSH.UN face the risk of succumbing to its debt-load?

CSH.UN is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether CSH.UN 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 CSH.UN's, case, the ratio of 1.34x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as CSH.UN’s low interest coverage already puts the company at higher risk of default.

Next Steps:

With a high level of debt on its balance sheet, CSH.UN could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for CSH.UN to increase its operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the mid-cap. This is only a rough assessment of financial health, and I'm sure CSH.UN has company-specific issues impacting its capital structure decisions. I suggest you continue to research Chartwell Retirement Residences to get a better picture of the stock by looking at:

  1. Valuation: What is CSH.UN 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 CSH.UN is currently mispriced by the market.
  2. Historical Performance: What has CSH.UN'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.
  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.

Valuation is complex, but we're helping make it simple.

Find out whether Chartwell Retirement Residences is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.