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CTI Logistics Limited (ASX:CLX) is a small-cap stock with a market capitalization of AU$71m. 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? Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into CLX here.
Does CLX produce enough cash relative to debt?
CLX’s debt level has been constant at around AU$44m over the previous year which accounts for long term debt. At this stable level of debt, CLX’s cash and short-term investments stands at AU$2.0m for investing into the business. Moreover, CLX has produced cash from operations of AU$8.9m during the same period of time, resulting in an operating cash to total debt ratio of 20%, signalling that CLX’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CLX’s case, it is able to generate 0.2x cash from its debt capital.
Can CLX meet its short-term obligations with the cash in hand?
With current liabilities at AU$28m, it seems that the business has been able to meet these obligations given the level of current assets of AU$31m, with a current ratio of 1.1x. Usually, for Logistics companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does CLX face the risk of succumbing to its debt-load?
With debt reaching 48% of equity, CLX may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if CLX’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For CLX, the ratio of 4.92x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as CLX’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although CLX’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how CLX has been performing in the past. I recommend you continue to research CTI Logistics to get a better picture of the small-cap by looking at: