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Is Carpenter Technology Corporation (NYSE:CRS) A Financially Sound Company?

Simply Wall St

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Investors are always looking for growth in small-cap stocks like Carpenter Technology Corporation (NYSE:CRS), with a market cap of US$2.3b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, 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. Nevertheless, these checks don't give you a full picture, so I’d encourage you to dig deeper yourself into CRS here.

Does CRS Produce Much Cash Relative To Its Debt?

CRS's debt levels surged from US$604m to US$676m over the last 12 months , which includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$19m , ready to be used for running the business. Additionally, CRS has produced US$176m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 26%, signalling that CRS’s operating cash is sufficient to cover its debt.

Does CRS’s liquid assets cover its short-term commitments?

At the current liabilities level of US$517m, it seems that the business has been able to meet these commitments with a current assets level of US$1.3b, leading to a 2.53x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Metals and Mining companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

NYSE:CRS Historical Debt, July 8th 2019

Can CRS service its debt comfortably?

CRS is a relatively highly levered company with a debt-to-equity of 43%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether CRS 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 CRS's, case, the ratio of 8.9x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving CRS ample headroom to grow its debt facilities.

Next Steps:

CRS’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 CRS'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 CRS has been performing in the past. You should continue to research Carpenter Technology to get a better picture of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for CRS’s future growth? Take a look at our free research report of analyst consensus for CRS’s outlook.
  2. Valuation: What is CRS 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 CRS is currently mispriced by the market.
  3. 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 editorial-team@simplywallst.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.