While small-cap stocks, such as Calix, Inc. (NYSE:CALX) with its market cap of US$499m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Communications companies, in particular ones that run negative earnings, tend to be high risk. Evaluating financial health as part of your investment thesis is vital. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into CALX here.
Does CALX produce enough cash relative to debt?
CALX’s debt level has been constant at around US$30m over the previous year made up of predominantly near term debt. At this constant level of debt, CALX currently has US$53m remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of CALX’s operating efficiency ratios such as ROA here.
Does CALX’s liquid assets cover its short-term commitments?
At the current liabilities level of US$137m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.18x. For Communications 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.
Is CALX’s debt level acceptable?
With a debt-to-equity ratio of 21%, CALX’s debt level may be seen as prudent. This range is considered safe as CALX is not taking on too much debt obligation, which may be constraining for future growth. Risk around debt is very low for CALX, and the company also has the ability and headroom to increase debt if needed going forward.
CALX has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure CALX has company-specific issues impacting its capital structure decisions. I recommend you continue to research Calix to get a better picture of the stock by looking at:
- Historical Performance: What has CALX’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 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 firstname.lastname@example.org.