Is CalAmp Corp’s (NASDAQ:CAMP) Balance Sheet A Threat To Its Future?

Investors are always looking for growth in small-cap stocks like CalAmp Corp (NASDAQ:CAMP), with a market cap of US$588m. However, an important fact which most ignore is: how financially healthy is the business? Communications companies, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is crucial. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into CAMP here.

How much cash does CAMP generate through its operations?

CAMP’s debt levels surged from US$151m to US$269m over the last 12 months , which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$305m , ready to deploy into the business. On top of this, CAMP has produced cash from operations of US$68m during the same period of time, resulting in an operating cash to total debt ratio of 25%, indicating that CAMP’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CAMP’s case, it is able to generate 0.25x cash from its debt capital.

Does CAMP’s liquid assets cover its short-term commitments?

With current liabilities at US$96m, the company has been able to meet these commitments with a current assets level of US$422m, leading to a 4.39x current account ratio. Having said that, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.

NasdaqGS:CAMP Historical Debt November 27th 18
NasdaqGS:CAMP Historical Debt November 27th 18

Is CAMP’s debt level acceptable?

With total debt exceeding equities, CAMP is considered a highly levered 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 CAMP’s case, the ratio of 1.89x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as CAMP’s low interest coverage already puts the company at higher risk of default.

Next Steps:

Although CAMP’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. Since there is also no concerns around CAMP’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure CAMP has company-specific issues impacting its capital structure decisions. You should continue to research CalAmp to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for CAMP’s future growth? Take a look at our free research report of analyst consensus for CAMP’s outlook.
  2. Valuation: What is CAMP 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 CAMP is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.com.