Corsa Coal Corp. (CVE:CSO) is a small-cap stock with a market capitalization of CA$70m. 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 vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into CSO here.
How does CSO’s operating cash flow stack up against its debt?
CSO’s debt level has been constant at around US$37m over the previous year – this includes long-term debt. At this constant level of debt, CSO currently has US$9.1m remaining in cash and short-term investments , ready to deploy into the business. Moreover, CSO has generated US$18m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 50%, meaning that CSO’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CSO’s case, it is able to generate 0.5x cash from its debt capital.
Can CSO meet its short-term obligations with the cash in hand?
At the current liabilities level of US$79m, it appears that the company may not be able to easily meet these obligations given the level of current assets of US$57m, with a current ratio of 0.72x.
Is CSO’s debt level acceptable?
With debt at 26% of equity, CSO may be thought of as appropriately levered. This range is considered safe as CSO is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether CSO 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 CSO’s, case, the ratio of 6.15x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving CSO ample headroom to grow its debt facilities.
CSO’s debt level is appropriate for a company its size. Furthermore, it is able to generate sufficient cash flow coverage, meaning it is able to put its debt in good use. Though its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for CSO’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Corsa Coal to get a better picture of the stock by looking at:
- Historical Performance: What has CSO’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.
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.
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