Is Centerra Gold Inc's (TSE:CG) Balance Sheet Strong Enough To Weather A Storm?

While small-cap stocks, such as Centerra Gold Inc (TSX:CG) with its market cap of CA$1.84B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company's financial health becomes crucial, 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 suggest you dig deeper yourself into CG here.

Does CG generate enough cash through operations?

CG has built up its total debt levels in the last twelve months, from $76.0M to $495.0M , which is made up of current and long term debt. With this rise in debt, the current cash and short-term investment levels stands at $160.1M , ready to deploy into the business. Moreover, CG has generated cash from operations of $371.4M in the last twelve months, leading to an operating cash to total debt ratio of 75.03%, signalling that CG’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CG’s case, it is able to generate 0.75x cash from its debt capital.

Can CG meet its short-term obligations with the cash in hand?

With current liabilities at $226.6M, it seems that the business has been able to meet these obligations given the level of current assets of $1,015.2M, with a current ratio of 4.48x. However, anything about 3x may be excessive, since CG may be leaving too much capital in low-earning investments.

Is CG’s debt level acceptable?

With a debt-to-equity ratio of 17.25%, CG's debt level may be seen as prudent. This range is considered safe as CG is not taking on too much debt obligation, which may be constraining for future growth. We can test if CG’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For CG, the ratio of 12.88x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as CG’s high interest coverage is seen as responsible and safe practice.

Next Steps:

CG has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I'm sure CG has company-specific issues impacting its capital structure decisions. I suggest you continue to research Centerra Gold to get a more holistic view of the stock by looking at:

• 1. Future Outlook: What are well-informed industry analysts predicting for CG’s future growth? Take a look at our free research report of analyst consensus for CG’s outlook.
• 2. Valuation: What is CG 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 CG 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.

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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.