Are Carr’s Group plc’s (LON:CARR) Interest Costs Too High?
Investors are always looking for growth in small-cap stocks like Carr’s Group plc (LSE:CARR), with a market cap of UK£128.19M. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into CARR here.
How does CARR’s operating cash flow stack up against its debt?
CARR has shrunken its total debt levels in the last twelve months, from UK£40.27M to UK£38.03M , which is made up of current and long term debt. With this debt repayment, the current cash and short-term investment levels stands at UK£23.89M for investing into the business. Moreover, CARR has produced UK£13.19M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 34.70%, signalling that CARR’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CARR’s case, it is able to generate 0.35x cash from its debt capital.
Does CARR’s liquid assets cover its short-term commitments?
At the current liabilities level of UK£73.72M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.64x. For Food companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Is CARR’s debt level acceptable?
With debt reaching 44.91% of equity, CARR may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if CARR’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For CARR, the ratio of 16.65x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as CARR’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although CARR’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how CARR has been performing in the past. I suggest you continue to research Carr’s Group to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for CARR’s future growth? Take a look at our free research report of analyst consensus for CARR’s outlook.
Valuation: What is CARR 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 CARR 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.
