Yahoo Finance Are Cervus Equipment Corporation’s (TSE:CERV) Interest Costs Too High?
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Cervus Equipment Corporation (TSE:CERV) is a small-cap stock with a market capitalization of CA$210m. 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 crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into CERV here.
How much cash does CERV generate through its operations?
Over the past year, CERV has ramped up its debt from CA$194m to CA$214m , which accounts for long term debt. With this growth in debt, CERV’s cash and short-term investments stands at CA$8.8m for investing into the business. Moreover, CERV has generated cash from operations of CA$8.4m in the last twelve months, resulting in an operating cash to total debt ratio of 3.9%, signalling that CERV’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CERV’s case, it is able to generate 0.039x cash from its debt capital.
Does CERV’s liquid assets cover its short-term commitments?
With current liabilities at CA$252m, it appears that the company has been able to meet these obligations given the level of current assets of CA$428m, with a current ratio of 1.7x. Usually, for Trade Distributors companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does CERV face the risk of succumbing to its debt-load?
With debt reaching 88% of equity, CERV may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether CERV is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In CERV’s, case, the ratio of 6.78x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving CERV ample headroom to grow its debt facilities.
Next Steps:
Although CERV’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 CERV has been performing in the past. I recommend you continue to research Cervus Equipment to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for CERV’s future growth? Take a look at our free research report of analyst consensus for CERV’s outlook.
Valuation: What is CERV worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CERV is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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