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Is Central Garden & Pet Company's (NASDAQ:CENT) Balance Sheet Strong Enough To Weather A Storm?

Simply Wall St

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While small-cap stocks, such as Central Garden & Pet Company (NASDAQ:CENT) with its market cap of US$1.5b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. 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’d encourage you to dig deeper yourself into CENT here.

CENT’s Debt (And Cash Flows)

Over the past year, CENT has maintained its debt levels at around US$698m including long-term debt. At this current level of debt, the current cash and short-term investment levels stands at US$330m to keep the business going. Additionally, CENT has generated cash from operations of US$129m over the same time period, leading to an operating cash to total debt ratio of 18%, meaning that CENT’s operating cash is less than its debt.

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

At the current liabilities level of US$299m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 4.52x. The current ratio is calculated by dividing current assets by current liabilities. However, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.

NasdaqGS:CENT Historical Debt, June 12th 2019

Does CENT face the risk of succumbing to its debt-load?

CENT is a relatively highly levered company with a debt-to-equity of 70%. 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 test if CENT’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 CENT, the ratio of 4.35x 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.

Next Steps:

Although CENT’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 CENT has been performing in the past. I recommend you continue to research Central Garden & Pet to get a more holistic view of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for CENT’s future growth? Take a look at our free research report of analyst consensus for CENT’s outlook.
  2. Valuation: What is CENT 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 CENT 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.