Cambria Automobiles plc (LON:CAMB) is a small-cap stock with a market capitalization of UK£53m. 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 Specialty Retail industry facing headwinds from current disruption, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is essential. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into CAMB here.
How much cash does CAMB generate through its operations?
Over the past year, CAMB has ramped up its debt from UK£14m to UK£17m , which includes long-term debt. With this increase in debt, CAMB’s cash and short-term investments stands at UK£16m , ready to deploy into the business. Additionally, CAMB has produced cash from operations of UK£12m over the same time period, resulting in an operating cash to total debt ratio of 74%, meaning that CAMB’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 CAMB’s case, it is able to generate 0.74x cash from its debt capital.
Can CAMB pay its short-term liabilities?
Looking at CAMB’s UK£148m in current liabilities, it seems that the business may not have an easy time meeting these commitments with a current assets level of UK£138m, leading to a current ratio of 0.93x.
Does CAMB face the risk of succumbing to its debt-load?
CAMB’s level of debt is appropriate relative to its total equity, at 31%. This range is considered safe as CAMB is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether CAMB 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 CAMB’s, case, the ratio of 14.9x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
CAMB has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Though its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for CAMB’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Cambria Automobiles to get a better picture of the stock by looking at: