While small-cap stocks, such as The Colonial Motor Company Limited (NZSE:CMO) with its market cap of NZ$250.44M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Specialty Retail industry facing headwinds from current disruption, even ones that are profitable, tend to be high risk. Assessing first and foremost the financial health is essential. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I recommend you dig deeper yourself into CMO here.
How does CMO’s operating cash flow stack up against its debt?
CMO has sustained its debt level by about NZ$88.72M over the last 12 months made up of current and long term debt. At this current level of debt, the current cash and short-term investment levels stands at NZ$8.06M , ready to deploy into the business. Moreover, CMO has produced cash from operations of NZ$15.83M over the same time period, leading to an operating cash to total debt ratio of 17.84%, signalling that CMO’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CMO’s case, it is able to generate 0.18x cash from its debt capital.
Can CMO pay its short-term liabilities?
Looking at CMO’s most recent NZ$125.21M liabilities, it appears that the company has been able to meet these commitments with a current assets level of NZ$194.14M, leading to a 1.55x current account ratio. Usually, for Specialty Retail companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can CMO service its debt comfortably?With a debt-to-equity ratio of 57.85%, CMO can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In CMO's case, the ratio of 9.74x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as CMO’s high interest coverage is seen as responsible and safe practice.
CMO’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I'm sure CMO has company-specific issues impacting its capital structure decisions. You should continue to research Colonial Motor to get a better picture of the stock by looking at:
- 1. Historical Performance: What has CMO'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.
- 2. 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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