Is Canadian Tire Corporation Limited’s (TSE:CTC.A) Balance Sheet A Threat To Its Future?
Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Canadian Tire Corporation Limited (TSX:CTC.A), with a market cap of CA$11.88B, often get neglected by retail investors. However, generally ignored mid-caps have historically delivered better risk-adjusted returns than the two other categories of stocks. Let’s take a look at CTC.A’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Don’t forget that this is a general and concentrated examination of Amazon’s financial health, so you should conduct further analysis into CTC.A here. View our latest analysis for Canadian Tire
Does CTC.A generate enough cash through operations?
CTC.A’s debt level has been constant at around CA$5.94B over the previous year – this includes both the current and long-term debt. At this constant level of debt, CTC.A currently has CA$569.50M remaining in cash and short-term investments , ready to deploy into the business. On top of this, CTC.A has generated CA$972.80M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 16.39%, indicating that CTC.A’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CTC.A’s case, it is able to generate 0.16x cash from its debt capital.
Can CTC.A meet its short-term obligations with the cash in hand?
With current liabilities at CA$4.52B, it seems that the business has been able to meet these obligations given the level of current assets of CA$8.80B, with a current ratio of 1.95x. Usually, for Multiline Retail companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can CTC.A service its debt comfortably?
CTC.A is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether CTC.A 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 CTC.A’s, case, the ratio of 10.84x 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.
Next Steps:
CTC.A’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure CTC.A has company-specific issues impacting its capital structure decisions. I suggest you continue to research Canadian Tire to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for CTC.A’s future growth? Take a look at our free research report of analyst consensus for CTC.A’s outlook.
Valuation: What is CTC.A 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 CTC.A 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.
To help readers see pass 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.
