While small-cap stocks, such as Carr's Group plc (LON:CARR) with its market cap of UK£136m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to 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. However, these checks don't give you a full picture, so I suggest you dig deeper yourself into CARR here.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Does CARR Produce Much Cash Relative To Its Debt?
CARR has built up its total debt levels in the last twelve months, from UK£50m to UK£53m , which accounts for long term debt. With this growth in debt, CARR's cash and short-term investments stands at UK£29m to keep the business going. Moreover, CARR has produced cash from operations of UK£9.7m during the same period of time, leading to an operating cash to total debt ratio of 19%, meaning that CARR’s operating cash is less than its debt.
Does CARR’s liquid assets cover its short-term commitments?
At the current liabilities level of UK£95m, it seems that the business has been able to meet these obligations given the level of current assets of UK£148m, with a current ratio of 1.55x. The current ratio is the number you get when you divide current assets by current liabilities. For Food companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is CARR’s debt level acceptable?
With debt reaching 43% of equity, CARR may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether CARR 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 CARR's, case, the ratio of 12.03x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as CARR’s high interest coverage is seen as responsible and safe practice.
CARR’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 CARR's financial health. Other important fundamentals need to be considered alongside. You should continue to research Carr's Group to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CARR’s future growth? Take a look at our free research report of analyst consensus for CARR’s outlook.
- Valuation: What is CARR 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 CARR 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.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.