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Is Century Aluminum Company's (NASDAQ:CENX) Balance Sheet A Threat To Its Future?

Simply Wall St

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Investors are always looking for growth in small-cap stocks like Century Aluminum Company (NASDAQ:CENX), with a market cap of US$607m. However, an important fact which most ignore is: how financially healthy is the business? Since CENX is loss-making right now, it’s essential to evaluate 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. Nevertheless, this is just a partial view of the stock, and I recommend you dig deeper yourself into CENX here.

Does CENX Produce Much Cash Relative To Its Debt?

Over the past year, CENX has ramped up its debt from US$256m to US$320m – this includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$22m 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 take a look at some of CENX’s operating efficiency ratios such as ROA here.

Can CENX pay its short-term liabilities?

Looking at CENX’s US$230m in current 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 2.1x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Metals and Mining companies, this is a reasonable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

NasdaqGS:CENX Historical Debt, July 8th 2019

Is CENX’s debt level acceptable?

CENX is a relatively highly levered company with a debt-to-equity of 41%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since CENX is currently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

Although CENX’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. Since there is also no concerns around CENX'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 CENX has been performing in the past. I suggest you continue to research Century Aluminum to get a more holistic view of the small-cap by looking at:

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