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Investors are always looking for growth in small-cap stocks like CEPS PLC (LON:CEPS), with a market cap of UK£5.9m. However, an important fact which most ignore is: how financially healthy is the business? Given that CEPS is not presently profitable, it’s vital to understand the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. However, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into CEPS here.
Does CEPS Produce Much Cash Relative To Its Debt?
Over the past year, CEPS has reduced its debt from UK£5.7m to UK£3.9m , which also accounts for long term debt. With this debt payback, CEPS's cash and short-term investments stands at UK£1.7m , ready to be used for running the business. Moreover, CEPS has produced UK£1.1m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 28%, meaning that CEPS’s current level of operating cash is high enough to cover debt.
Can CEPS pay its short-term liabilities?
Looking at CEPS’s UK£5.9m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of UK£6.9m, leading to a 1.16x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Luxury companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can CEPS service its debt comfortably?
With a debt-to-equity ratio of 71%, CEPS can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. Though, since CEPS is currently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
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CEPS’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for CEPS's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research CEPS to get a better picture of the small-cap by looking at: