Investors are always looking for growth in small-cap stocks like Chorus Limited (NZSE:CNU), with a market cap of NZ$1.65B. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Telecom industry facing headwinds from current disruption, even ones that are profitable, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is essential. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into CNU here.

Does CNU generate an acceptable amount of cash through operations?

Over the past year, CNU has ramped up its debt from NZ$2.04B to NZ$2.25B – this includes both the current and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at NZ$171.00M , ready to deploy into the business. Additionally, CNU has generated cash from operations of NZ$524.00M during the same period of time, leading to an operating cash to total debt ratio of 23.34%, signalling that CNU’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CNU’s case, it is able to generate 0.23x cash from its debt capital.

Does CNU’s liquid assets cover its short-term commitments?

With current liabilities at NZ$411.00M, it seems that the business has not been able to meet these commitments with a current assets level of NZ$316.00M, leading to a 0.77x current account ratio. which is under the appropriate industry ratio of 3x.

Is CNU’s debt level acceptable?

Since total debt levels have outpaced equities, CNU is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether CNU 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 CNU’s, case, the ratio of 1.94x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.

Next Steps:

With a high level of debt on its balance sheet, CNU could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for CNU to increase its operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for CNU’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Chorus to get a more holistic view of the stock by looking at:

• 1. Future Outlook: What are well-informed industry analysts predicting for CNU’s future growth? Take a look at our free research report of analyst consensus for CNU’s outlook.

• 2. Historical Performance: What has CNU’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

• 3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

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.