Is Canadian Zinc Corporation (TSE:CZN) A Financially Sound Company?
Canadian Zinc Corporation (TSX:CZN) is a small-cap stock with a market capitalization of CA$39.92M. 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? Given that CZN is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into CZN here.
How does CZN’s operating cash flow stack up against its debt?
Over the past year, CZN has borrowed debt capital of around CA$12.42M made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at CA$13.01M , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of CZN’s operating efficiency ratios such as ROA here.
Can CZN pay its short-term liabilities?
At the current liabilities level of CA$1.65M liabilities, it appears that the company has been able to meet these commitments with a current assets level of CA$13.44M, leading to a 8.16x current account ratio. Though, anything about 3x may be excessive, since CZN may be leaving too much capital in low-earning investments.
Is CZN’s debt level acceptable?
Since total debt levels have outpaced equities, CZN is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since CZN is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
CZN’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. I admit this is a fairly basic analysis for CZN’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Canadian Zinc to get a better picture of the stock by looking at:
Historical Performance: What has CZN’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 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.
