While small-cap stocks, such as Crusader Resources Limited (ASX:CAS) with its market cap of AUD A$27.70M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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 CAS
Does CAS generate an acceptable amount of cash through operations?
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 CAS pay off what it owes to its debtholder by using only cash from its operational activities? In the case of CAS, operating cash flow turned out to be -5.28x its debt level over the past twelve months. This means what CAS can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at CAS’s operations at this point in time.
Does CAS’s liquid assets cover its short-term commitments?
What about its other commitments such as payments to suppliers and salaries to its employees? During times of unfavourable events, CAS could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We test for CAS’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that CAS 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 CAS service its debt comfortably?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. For CAS, the debt-to-equity ratio is 9.16%, which means debt is low and does not pose any significant threat to the company’s operations.
Next Steps:
Are you a shareholder? Although CAS’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Given that its financial position may change. You should always be keeping on top of market expectations for CAS’s future growth on our free analysis platform.