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Is Coda Octopus Group Inc’s (NASDAQ:CODA) Balance Sheet A Threat To Its Future?

Donald Bartholomew

While small-cap stocks, such as Coda Octopus Group Inc (NASDAQ:CODA) with its market cap of US$47.2m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Electronic industry, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes essential. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I suggest you dig deeper yourself into CODA here.

How does CODA’s operating cash flow stack up against its debt?

Over the past year, CODA has reduced its debt from US$9.0m to US$2.8m – this includes both the current and long-term debt. With this debt repayment, the current cash and short-term investment levels stands at US$6.9m for investing into the business. On top of this, CODA has produced US$2.6m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 93.7%, signalling that CODA’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CODA’s case, it is able to generate 0.94x cash from its debt capital.

Can CODA pay its short-term liabilities?

With current liabilities at US$2.8m, it seems that the business has been able to meet these commitments with a current assets level of US$15.0m, leading to a 5.4x current account ratio. Though, a ratio greater than 3x may be considered as too high, as CODA could be holding too much capital in a low-return investment environment.

NasdaqCM:CODA Historical Debt September 14th 18

Is CODA’s debt level acceptable?

With debt at 13.9% of equity, CODA may be thought of as appropriately levered. This range is considered safe as CODA is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether CODA 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 CODA’s, case, the ratio of 2.82x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.

Next Steps:

CODA has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure CODA has company-specific issues impacting its capital structure decisions. I recommend you continue to research Coda Octopus Group to get a more holistic view of the stock by looking at:

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

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 editorial-team@simplywallst.com.