While small-cap stocks, such as Carpenter Technology Corporation (NYSE:CRS) with its market cap of US$1.8b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into CRS here.
How does CRS’s operating cash flow stack up against its debt?
CRS’s debt levels have fallen from US$608m to US$549m over the last 12 months , which includes long-term debt. With this debt payback, CRS’s cash and short-term investments stands at US$17m , ready to deploy into the business. Moreover, CRS has produced cash from operations of US$226m during the same period of time, resulting in an operating cash to total debt ratio of 41%, indicating that CRS’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CRS’s case, it is able to generate 0.41x cash from its debt capital.
Can CRS meet its short-term obligations with the cash in hand?
Looking at CRS’s US$363m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.27x. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Is CRS’s debt level acceptable?
CRS’s level of debt is appropriate relative to its total equity, at 37%. CRS is not taking on too much debt commitment, which may be constraining for future growth. 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 7.05x suggests that interest is appropriately 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.
CRS’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how CRS has been performing in the past. I recommend you continue to research Carpenter Technology to get a better picture of the stock by looking at:
- 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.
- 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.
- 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 email@example.com.