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Cabot Corporation (NYSE:CBT) is a small-cap stock with a market capitalization of US$2.8b. 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? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into CBT here.
CBT’s Debt (And Cash Flows)
CBT's debt levels surged from US$961m to US$1.3b over the last 12 months , which includes long-term debt. With this rise in debt, CBT currently has US$176m remaining in cash and short-term investments , ready to be used for running the business. Moreover, CBT has generated cash from operations of US$268m during the same period of time, leading to an operating cash to total debt ratio of 21%, indicating that CBT’s current level of operating cash is high enough to cover debt.
Does CBT’s liquid assets cover its short-term commitments?
With current liabilities at US$1.1b, it seems that the business has been able to meet these obligations given the level of current assets of US$1.5b, with a current ratio of 1.34x. The current ratio is calculated by dividing current assets by current liabilities. For Chemicals companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Does CBT face the risk of succumbing to its debt-load?
With total debt exceeding equity, CBT is considered a highly levered 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 CBT 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 CBT's, case, the ratio of 8.15x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as CBT’s high interest coverage is seen as responsible and safe practice.
Although CBT’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 CBT'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 CBT has company-specific issues impacting its capital structure decisions. You should continue to research Cabot to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CBT’s future growth? Take a look at our free research report of analyst consensus for CBT’s outlook.
- Valuation: What is CBT 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 CBT 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 firstname.lastname@example.org. 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.