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Investors are always looking for growth in small-cap stocks like Capstone Turbine Corporation (NASDAQ:CPST), with a market cap of US$62m. However, an important fact which most ignore is: how financially healthy is the business? Since CPST is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into CPST here.
Does CPST Produce Much Cash Relative To Its Debt?
Over the past year, CPST has maintained its debt levels at around US$11m including long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at US$11m to keep the business going. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. For this article’s sake, I won’t be looking at this today, but you can examine some of CPST’s operating efficiency ratios such as ROA here.
Can CPST meet its short-term obligations with the cash in hand?
At the current liabilities level of US$35m, it seems that the business has been able to meet these commitments with a current assets level of US$52m, leading to a 1.48x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Electrical companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Can CPST service its debt comfortably?
CPST is a relatively highly levered company with a debt-to-equity of 45%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. But since CPST is presently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
CPST’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around CPST's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how CPST has been performing in the past. You should continue to research Capstone Turbine to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CPST’s future growth? Take a look at our free research report of analyst consensus for CPST’s outlook.
- Valuation: What is CPST 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 CPST 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 email@example.com. 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.