Investors are always looking for growth in small-cap stocks like The Citadel Group Limited (ASX:CGL), with a market cap of AU$325.50M. However, an important fact which most ignore is: how financially healthy is the business? IT companies, even ones that are profitable, are more likely to be 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. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into CGL here.
Does CGL generate an acceptable amount of cash through operations?
Over the past year, CGL has ramped up its debt from AU$1.27M to AU$8.86M , which comprises of short- and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at AU$29.82M for investing into the business. Moreover, CGL has generated AU$19.94M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 224.96%, indicating that CGL’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CGL’s case, it is able to generate 2.25x cash from its debt capital.
Can CGL pay its short-term liabilities?
At the current liabilities level of AU$43.46M liabilities, it seems that the business has been able to meet these commitments with a current assets level of AU$56.17M, leading to a 1.29x current account ratio. Generally, for IT companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does CGL face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 25.44%, CGL’s debt level may be seen as prudent. This range is considered safe as CGL is not taking on too much debt obligation, which can be restrictive and risky for equity-holders.
Next Steps:
CGL’s debt level is appropriate for a company its size, and it is also able to generate sufficient cash flow coverage, meaning it has been able to put its debt in good use. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure CGL has company-specific issues impacting its capital structure decisions. You should continue to research Citadel Group to get a better picture of the stock by looking at: