Is Carel Industries S.p.A.'s (BIT:CRL) Balance Sheet A Threat To Its Future?
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While small-cap stocks, such as Carel Industries S.p.A. (BIT:CRL) with its market cap of €1.1b, 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, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into CRL here.
Does CRL Produce Much Cash Relative To Its Debt?
Over the past year, CRL has ramped up its debt from €70m to €117m , which accounts for long term debt. With this growth in debt, CRL currently has €40m remaining in cash and short-term investments , ready to be used for running the business. On top of this, CRL has produced €29m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 25%, signalling that CRL’s debt is appropriately covered by operating cash.
Can CRL pay its short-term liabilities?
Looking at CRL’s €99m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of €171m, with a current ratio of 1.73x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Electronic 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.
Is CRL’s debt level acceptable?
With a debt-to-equity ratio of 91%, CRL 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. We can check to see whether CRL 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 CRL's, case, the ratio of 120x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as CRL’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although CRL’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 CRL's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure CRL has company-specific issues impacting its capital structure decisions. You should continue to research Carel Industries to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for CRL’s future growth? Take a look at our free research report of analyst consensus for CRL’s outlook.
Valuation: What is CRL 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 CRL 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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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
