How Financially Strong Is Catena Media p.l.c (STO:CTM)?

Simply Wall St

Sun, Apr 7, 2019, 2:28 AM

While small-cap stocks, such as Catena Media p.l.c (STO:CTM) with its market cap of kr3.4b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into CTM here.

CTM’s Debt (And Cash Flows)

CTM has built up its total debt levels in the last twelve months, from €103m to €144m – this includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at €13m to keep the business going. Moreover, CTM has produced €41m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 28%, indicating that CTM’s operating cash is sufficient to cover its debt.

Can CTM meet its short-term obligations with the cash in hand?

With current liabilities at €67m, the company may not be able to easily meet these obligations given the level of current assets of €35m, with a current ratio of 0.51x. The current ratio is calculated by dividing current assets by current liabilities.

Does CTM face the risk of succumbing to its debt-load?

CTM is a highly-leveraged company with debt exceeding equity by over 100%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if CTM’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 CTM, the ratio of 3.48x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving CTM ample headroom to grow its debt facilities.

Next Steps:

CTM’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven't considered other factors such as how CTM has been performing in the past. I recommend you continue to research Catena Media p.l.c to get a better picture of the stock by looking at: