Cavalier Corporation Limited (NZSE:CAV) is a small-cap stock with a market capitalization of NZ$27.47M. 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? Companies operating in the consumer durables industry facing headwinds from current disruption, in particular ones that run negative earnings, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is crucial. 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 CAV here.
How does CAV’s operating cash flow stack up against its debt?
Over the past year, CAV has ramped up its debt from NZ$37.7M to NZ$41.5M , which is made up of current and long term debt. With this increase in debt, CAV’s cash and short-term investments stands at NZ$1.3M for investing into the business. Though its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of CAV’s operating efficiency ratios such as ROA here.
Does CAV’s liquid assets cover its short-term commitments?
Looking at CAV’s most recent NZ$32.2M liabilities, the company has been able to meet these commitments with a current assets level of NZ$70.4M, leading to a 2.18x current account ratio. Generally, for consumer durables companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does CAV face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 61.13%, CAV can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since CAV is presently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Are you a shareholder? CAV’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Given that its financial position may change. I suggest keeping abreast of market expectations for CAV’s future growth on our free analysis platform.