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Commercial Vehicle Group, Inc. (NASDAQ:CVGI) is a small-cap stock with a market capitalization of US$223m. 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? Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into CVGI here.
CVGI’s Debt (And Cash Flows)
CVGI has sustained its debt level by about US$181m over the last 12 months including long-term debt. At this current level of debt, CVGI's cash and short-term investments stands at US$54m , ready to be used for running the business. Additionally, CVGI has produced US$55m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 30%, indicating that CVGI’s operating cash is sufficient to cover its debt.
Can CVGI pay its short-term liabilities?
At the current liabilities level of US$140m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.38x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Machinery companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is CVGI’s debt level acceptable?
With total debt exceeding equity, CVGI is considered a highly levered company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In CVGI's case, the ratio of 4.15x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as CVGI’s high interest coverage is seen as responsible and safe practice.