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CRA International, Inc. (NASDAQ:CRAI) is a small-cap stock with a market capitalization of US$305m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Understanding the company’s financial health becomes 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. Nevertheless, this is not a comprehensive overview, so I suggest you dig deeper yourself into CRAI here.
Does CRAI Produce Much Cash Relative To Its Debt?
CRAI’s debt levels surged from US$10m to US$143m over the last 12 months , which accounts for long term debt. With this increase in debt, CRAI currently has US$15m remaining in cash and short-term investments , ready to be used for running the business. Moreover, CRAI has generated US$20m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 14%, signalling that CRAI’s debt is not covered by operating cash.
Does CRAI’s liquid assets cover its short-term commitments?
Looking at CRAI’s US$149m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.12x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Professional Services companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does CRAI face the risk of succumbing to its debt-load?
With debt reaching 73% of equity, CRAI 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 check to see whether CRAI is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In CRAI’s, case, the ratio of 46.45x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as CRAI’s high interest coverage is seen as responsible and safe practice.
Although CRAI’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 CRAI has company-specific issues impacting its capital structure decisions. I recommend you continue to research CRA International to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CRAI’s future growth? Take a look at our free research report of analyst consensus for CRAI’s outlook.
- Valuation: What is CRAI 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 CRAI 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.