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Investors are always looking for growth in small-cap stocks like Comet Industries Ltd. (CVE:CMU), with a market cap of CA$13m. However, an important fact which most ignore is: how financially healthy is the business? Since CMU is loss-making right now, it’s vital to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into CMU here.
How does CMU’s operating cash flow stack up against its debt?
Over the past year, CMU has maintained its debt levels at around CA$927k which accounts for long term debt. At this stable level of debt, CMU’s cash and short-term investments stands at CA$50k for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of CMU’s operating efficiency ratios such as ROA here.
Does CMU’s liquid assets cover its short-term commitments?
With current liabilities at CA$1.1m, it appears that the company may not be able to easily meet these obligations given the level of current assets of CA$106k, with a current ratio of 0.094x.
Can CMU service its debt comfortably?
CMU is a relatively highly levered company with a debt-to-equity of 89%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since CMU is presently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
CMU’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. However, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure CMU has company-specific issues impacting its capital structure decisions. You should continue to research Comet Industries to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CMU’s future growth? Take a look at our free research report of analyst consensus for CMU’s outlook.
- Valuation: What is CMU 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 CMU 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 editorial-team@simplywallst.com.