Investors are always looking for growth in small-cap stocks like Continental Materials Corporation (AMEX:CUO), with a market cap of USD $32.42M. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into CUO here.
Does CUO generate an acceptable amount of cash through operations?
CUO’s debt levels have fallen from $6.2M to $2.0M over the last 12 months , which is mainly comprised of near term debt. With this reduction in debt, CUO currently has $0.3M remaining in cash and short-term investments , ready to deploy into the business. Moreover, CUO has generated cash from operations of $8.1M in the last twelve months, resulting in an operating cash to total debt ratio of 4.05x, indicating that CUO’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 CUO’s case, it is able to generate 4.05x cash from its debt capital.
Can CUO meet its short-term obligations with the cash in hand?
With current liabilities at $19.8M liabilities, the company has been able to meet these obligations given the level of current assets of $45.9M, with a current ratio of 2.32x. Usually, for building products companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can CUO service its debt comfortably?
With a debt-to-equity ratio of 14.09%, CUO’s debt level may be seen as prudent. This range is considered safe as CUO is not taking on too much debt obligation, which may be constraining for future growth. We can test if CUO’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For CUO, the ratio of 13.71x suggests that interest is excessively covered, which means that lenders may be less hesitant to lend out more funding as CUO’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Are you a shareholder? Although CUO’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that its financial position may be different. You should always be researching market expectations for CUO’s future growth on our free analysis platform.