Small-caps and large-caps are wildly popular among investors; however, mid-cap stocks, such as CAE Inc (TSX:CAE) with a market-capitalization of CA$6.26B, rarely draw their attention and few analysts cover them. Surprisingly though, when accounted for risk, mid-caps have delivered better returns compared to the two other categories of stocks. Mid-caps are found to be more volatile than the large-caps but safer than small-caps, largely due to their weaker balance sheet. I’ve put together a small checklist, which I believe provides a ballpark estimate of their financial health status. See our latest analysis for CAE
Is CAE’s level of debt at an acceptable level?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. CAE’s debt-to-equity ratio stands at 57.34%, which means, while the company’s debt could pose a problem for its earnings stability, it is not at an alarmingly high level yet. 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 (EBIT) at least three times its interest payments is considered financially sound. CAE’s profits amply covers interest at 6.59 times, which is seen as relatively safe. Debtors may be willing to loan the company more money, giving CAE ample headroom to grow its debt facilities.
Does CAE’s liquid assets cover its short-term commitments?
Debt to equity ratio is an important aspect of financial strength. But if the company has a substantial amount of cash on its balance sheet, that should allay some fear of a debt overhang and increase the chance of meeting upcoming liabilities. We need to assess CAE’s cash and other liquid assets against its upcoming expenses. Our analysis shows that CAE does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Next Steps:
Are you a shareholder? CAE’s high debt level shouldn’t be an impetus for investors to sell given its high operating cash flow seems adequate to meet obligations which means its debt is being put to good use. Given that CAE’s financial position could change over time, I recommend researching market expectations for CAE’s future growth on our free analysis platform.
Are you a potential investor? Although 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. CAE’s Return on Capital Employed (ROCE) in order to see management’s track record at deploying funds in high-returning projects.
To help readers see pass 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.