While small-cap stocks, such as Chemring Group PLC (LON:CHG) with its market cap of UK£426m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since CHG is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. 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 CHG here.
How much cash does CHG generate through its operations?
Over the past year, CHG has reduced its debt from UK£114m to UK£91m , which also accounts for long term debt. With this debt repayment, CHG’s cash and short-term investments stands at UK£9.6m , ready to deploy into the business. Moreover, CHG has generated cash from operations of UK£36m during the same period of time, resulting in an operating cash to total debt ratio of 39%, meaning that CHG’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In CHG’s case, it is able to generate 0.39x cash from its debt capital.
Does CHG’s liquid assets cover its short-term commitments?
Looking at CHG’s UK£103m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of UK£187m, leading to a 1.81x current account ratio. For Aerospace & Defense companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does CHG face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 31%, CHG’s debt level may be seen as prudent. This range is considered safe as CHG is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. CHG’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
CHG’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how CHG has been performing in the past. You should continue to research Chemring Group to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CHG’s future growth? Take a look at our free research report of analyst consensus for CHG’s outlook.
- Valuation: What is CHG 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 CHG 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 email@example.com.