CSR Limited (ASX:CSR) is a small-cap stock with a market capitalization of AUD A$2.24B. 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. The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. These factors make a basic understanding of a company’s financial position of utmost importance for a potential investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. See our latest analysis for CSR

Does CSR generate enough cash through operations?

There are many headwinds that come unannounced, such as natural disasters and political turmoil, which can challenge a small business and its ability to adapt and recover. These catastrophes does not mean the company can stop servicing its debt obligations. We can test the impact of these adverse events by looking at whether cash from its current operations can pay back its current debt obligations. CSR’s recent operating cash flow exceeded its debt obligations within the past year, which means CSR generates enough money in a year through its operations to pay off its near-term debt. Hence, debt poses a virtually insignificant risk for the company. This reflects proper cash and debt management by the company – great news for both debtholders and shareholders.

Can CSR pay its short-term liabilities?

In addition to debtholders, a company must be able to pay its bills and salaries to keep the business running. In times of adverse events, CSR may need to liquidate its short-term assets to pay these immediate obligations. We test for CSR’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that CSR does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.

Is CSR’s level of debt at an acceptable level?

Debt-to-equity ratio tells us how much of the asset debtors could claim if the company went out of business. For CSR, the debt-to-equity ratio is 1.59%, which indicates that the company faces low risk associated with debt. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings at least three times its interest payments is considered financially sound. CSR’s profits amply covers interest at 86 times, which is seen as relatively safe. Lenders may be less hesitant to lend out more funding as CSR’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Are you a shareholder? CSR’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Moving forward, CSR’s financial situation may change. You should always be researching market expectations for CSR’s future growth on our free analysis platform.

Are you a potential investor? CSR’s high cash coverage and low levels of debt indicate its ability to use its borrowings efficiently in order to produce a healthy cash flow. Moreover, its high liquidity means the company should continue to operate smoothly in the case of adverse events. In order to build your confidence in the stock, you need to further analyse the company’s track record. You should continue your analysis by taking a look at CSR’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.

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.