Stocks with market capitalization between $2B and $10B, such as Compass Minerals International Inc (NYSE:CMP) with a size of $2.54B, do not attract as much attention from the investing community as do the small-caps and large-caps. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups, primarily due to seasoned executives running a lean corporate structure. I recommend you look at the following hurdles to assess CMP’s financial health. View our latest analysis for Compass Minerals International
Does CMP face the risk of succumbing to its debt-load?
Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. CMP’s debt-to-equity ratio exceeds 100%, which means that it is a highly leveraged company. This is not a problem if the company has consistently grown its profits. But during a business downturn, availability of cash may dry up, making it hard to operate. While debt-to-equity ratio has several factors at play, an easier way to check whether CMP’s leverage is at a sustainable level is to check its ability to service the debt. A company generating earnings (EBIT) at least three times its interest payments is considered financially sound. CMP’s profits only covers interest 2.81 times, which is deemed as inadequate. Debtors may be less inclined to loan the company more money, giving CMP less headroom for growth through debt.
Does CMP’s liquid assets cover its short-term commitments?
A different measure of financial health is measured by its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. If an adverse event occurs, the company may be forced to pay these immediate expenses with its liquid assets. To assess this, I compare CMP’s cash and other liquid assets against its upcoming debt. Our analysis shows that CMP does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Are you a shareholder? CMP’s high debt levels are not met with high cash flow coverage. This means investors should ask themselves if they think CMP can improve in terms of debt management and operational efficiency. Since CMP’s capital structure could change, I recommend examining market expectations for CMP’s future growth on our free analysis platform.
Are you a potential investor? While understanding the serviceability of debt is important when evaluating which companies are viable investments, it shouldn’t be the deciding factor. After all, debt is often used to fund or accelerate new projects that are expected to improve a company’s growth trajectory in the longer term. CMP’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.