Yahoo Finance Is CRH Medical Corporation (TSE:CRH) A Financially Sound Company?
CRH Medical Corporation (TSE:CRH) is a small-cap stock with a market capitalization of CA$286m. 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 vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into CRH here.
How does CRH’s operating cash flow stack up against its debt?
Over the past year, CRH has ramped up its debt from US$42m to US$64m , which comprises of short- and long-term debt. With this growth in debt, CRH currently has US$4m remaining in cash and short-term investments , ready to deploy into the business. Additionally, CRH has generated cash from operations of US$41m over the same time period, resulting in an operating cash to total debt ratio of 64%, indicating that CRH’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CRH’s case, it is able to generate 0.64x cash from its debt capital.
Does CRH’s liquid assets cover its short-term commitments?
With current liabilities at US$10m, it seems that the business has been able to meet these commitments with a current assets level of US$23m, leading to a 2.26x current account ratio. For General companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can CRH service its debt comfortably?
CRH is a relatively highly levered company with a debt-to-equity of 50%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether CRH 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 CRH’s, case, the ratio of 8x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
Although CRH’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. Since there is also no concerns around CRH’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for CRH’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research CRH Medical to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for CRH’s future growth? Take a look at our free research report of analyst consensus for CRH’s outlook.
Valuation: What is CRH 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 CRH 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
