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Is Chesapeake Utilities Corporation (NYSE:CPK) A Financially Sound Company?

Simply Wall St

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Chesapeake Utilities Corporation (NYSE:CPK) is a small-cap stock with a market capitalization of US$1.6b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Understanding the company's financial health becomes 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 CPK here.

Does CPK Produce Much Cash Relative To Its Debt?

Over the past year, CPK has ramped up its debt from US$461m to US$646m – this includes long-term debt. With this growth in debt, CPK currently has US$8.0m remaining in cash and short-term investments , ready to be used for running the business. On top of this, CPK has produced US$121m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 19%, signalling that CPK’s current level of operating cash is not high enough to cover debt.

Can CPK pay its short-term liabilities?

With current liabilities at US$509m, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.3x. The current ratio is calculated by dividing current assets by current liabilities.

NYSE:CPK Historical Debt, July 5th 2019

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

With total debt exceeding equity, CPK is considered a highly levered company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In CPK's case, the ratio of 5.3x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving CPK ample headroom to grow its debt facilities.

Next Steps:

CPK’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. However, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven't considered other factors such as how CPK has been performing in the past. I recommend you continue to research Chesapeake Utilities to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for CPK’s future growth? Take a look at our free research report of analyst consensus for CPK’s outlook.
  2. Historical Performance: What has CPK's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
  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.