Is Le Château Inc's (CVE:CTU) Balance Sheet A Threat To Its Future?

Investors are always looking for growth in small-cap stocks like Le Château Inc (CVE:CTU), with a market cap of CA$7.49m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Specialty Retail industry facing headwinds from current disruption, especially ones that are currently loss-making, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is crucial. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into CTU here.

Does CTU produce enough cash relative to debt?

CTU's debt levels surged from CA$88.32m to CA$94.04m over the last 12 months – this includes both the current and long-term debt. With this growth in debt, CTU currently has CA$0 remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn't be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of CTU’s operating efficiency ratios such as ROA here.

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

At the current liabilities level of CA$27.34m liabilities, the company has been able to meet these obligations given the level of current assets of CA$93.06m, with a current ratio of 3.4x. Though, anything above 3x is considered high and could mean that CTU has too much idle capital in low-earning investments.

Can CTU service its debt comfortably?

With total debt exceeding equities, CTU is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since CTU is currently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

CTU’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven't considered other factors such as how CTU has been performing in the past. You should continue to research Le Château to get a more holistic view of the stock by looking at:

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

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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.