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Cabot Corporation (NYSE:CBT) is a small-cap stock with a market capitalization of US$2.8b. 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? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into CBT here.
CBT’s Debt (And Cash Flows)
CBT's debt levels surged from US$961m to US$1.3b over the last 12 months , which includes long-term debt. With this rise in debt, CBT currently has US$176m remaining in cash and short-term investments , ready to be used for running the business. Moreover, CBT has generated cash from operations of US$268m during the same period of time, leading to an operating cash to total debt ratio of 21%, indicating that CBT’s current level of operating cash is high enough to cover debt.
Does CBT’s liquid assets cover its short-term commitments?
With current liabilities at US$1.1b, it seems that the business has been able to meet these obligations given the level of current assets of US$1.5b, with a current ratio of 1.34x. The current ratio is calculated by dividing current assets by current liabilities. For Chemicals companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Does CBT face the risk of succumbing to its debt-load?
With total debt exceeding equity, CBT is considered a highly levered company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether CBT is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In CBT's, case, the ratio of 8.15x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as CBT’s high interest coverage is seen as responsible and safe practice.