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Investors are always looking for growth in small-cap stocks like Cereal Planet PLC (WSE:CRP), with a market cap of zł20m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I suggest you dig deeper yourself into CRP here.
Does CRP produce enough cash relative to debt?
Over the past year, CRP has ramped up its debt from €1.9m to €2.7m made up of predominantly near term debt. With this growth in debt, CRP’s cash and short-term investments stands at €142k for investing into the business. On top of this, CRP has generated €264k in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 10.0%, indicating that CRP’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CRP’s case, it is able to generate 0.1x cash from its debt capital.
Can CRP pay its short-term liabilities?
Looking at CRP’s €6.0m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.02x. Usually, for Food companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can CRP service its debt comfortably?
CRP is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible.
Although CRP’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure CRP has company-specific issues impacting its capital structure decisions. I suggest you continue to research Cereal Planet to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CRP’s future growth? Take a look at our free research report of analyst consensus for CRP’s outlook.
- Historical Performance: What has CRP’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.
- 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.