While small-cap stocks, such as CentralNic Group Plc (LON:CNIC) with its market cap of UK£80m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company’s balance sheet strength. However, this is just a partial view of the stock, and I recommend you dig deeper yourself into CNIC here.
Does CNIC Produce Much Cash Relative To Its Debt?
CNIC has built up its total debt levels in the last twelve months, from UK£1.8m to UK£16m , which includes long-term debt. With this increase in debt, CNIC currently has UK£7.9m remaining in cash and short-term investments to keep the business going. Moreover, CNIC has generated cash from operations of UK£1.6m in the last twelve months, resulting in an operating cash to total debt ratio of 9.8%, meaning that CNIC’s operating cash is less than its debt.
Can CNIC meet its short-term obligations with the cash in hand?
Looking at CNIC’s UK£30m in current liabilities, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.82x. The current ratio is calculated by dividing current assets by current liabilities.
Does CNIC face the risk of succumbing to its debt-load?
With debt reaching 65% of equity, CNIC may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if CNIC’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 CNIC, the ratio of 4.57x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving CNIC ample headroom to grow its debt facilities.
Next Steps:
CNIC’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. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure CNIC has company-specific issues impacting its capital structure decisions. You should continue to research CentralNic Group to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CNIC’s future growth? Take a look at our free research report of analyst consensus for CNIC’s outlook.
- Valuation: What is CNIC 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 CNIC 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.
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