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Cabot Microelectronics Corporation (NASDAQ:CCMP) is a small-cap stock with a market capitalization of US$3.5b. 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? Understanding the company's financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into CCMP here.
CCMP’s Debt (And Cash Flows)
CCMP's debt levels surged from US$141m to US$1.0b over the last 12 months – this includes long-term debt. With this growth in debt, CCMP's cash and short-term investments stands at US$209m to keep the business going. On top of this, CCMP has generated US$152m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 15%, meaning that CCMP’s debt is not covered by operating cash.
Does CCMP’s liquid assets cover its short-term commitments?
Looking at CCMP’s US$165m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$525m, leading to a 3.18x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Having said that, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
Does CCMP face the risk of succumbing to its debt-load?
Since total debt levels exceed equity, CCMP is a highly 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. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In CCMP's case, the ratio of 45.39x suggests that interest is comfortably 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.
Although CCMP’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 CCMP has been performing in the past. You should continue to research Cabot Microelectronics to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CCMP’s future growth? Take a look at our free research report of analyst consensus for CCMP’s outlook.
- Valuation: What is CCMP 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 CCMP 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.