Investors are always looking for growth in small-cap stocks like Crystal Rock Holdings Inc (AMEX:CRVP), with a market cap of USD $15.16M. However, an important fact which most ignore is: how financially healthy is the company? Why is it important? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. Thus, it becomes utmost important for an investor to test a company’s resilience for such contingencies. In simple terms, I believe these three small calculations tell most of the story you need to know. View our latest analysis for Crystal Rock Holdings
How does CRVP’s operating cash flow stack up against its debt?
Unxpected adverse events, such as natural disasters and wars, can be a true test of a company’s capacity to meet its obligations. Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future. Can CRVP pay off what it owes to its debtholder by using only cash from its operational activities? In the case of CRVP, operating cash flow turned out to be 0.24x its debt level over the past twelve months. This means, over a tenth of CRVP’s near term debt can be covered by its day-to-day cash income, which somewhat reduces its riskiness to its debtholders.
Does CRVP’s liquid assets cover its short-term commitments?
What about its commitments to other stakeholders such as payments to suppliers and employees? In times of adverse events, CRVP may need to liquidate its short-term assets to pay these immediate obligations. We test for CRVP’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that CRVP is unable to meet all of its upcoming commitments with its cash and other short-term assets. While this is not abnormal for companies, as their cash is better invested in the business or returned to investors than lying around, it does bring about some concerns should any unfavourable circumstances arise.
Can CRVP service its debt comfortably?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. CRVP’s debt-to-equity ratio exceeds 100%, which indicates that the company is holding a high level of debt relative to its net worth. In the event of financial turmoil, the company may experience difficulty meeting interest and other debt obligations. We can test if CRVP’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings should cover interest by at least three times, therefore reducing concerns when profit is highly volatile. CRVP’s profits only covers interest 1.37 times, which is deemed as inadequate. This means lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.