Investors are always looking for growth in small-cap stocks like Coda Octopus Group Inc (NASDAQ:CODA), with a market cap of US$36.23M. However, an important fact which most ignore is: how financially healthy is the business? Electronic companies, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is crucial. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I recommend 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$10.03M to US$8.28M , which is made up of current and long term debt. With this debt payback, the current cash and short-term investment levels stands at US$6.86M for investing into the business. Additionally, CODA has generated US$4.84M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 58.46%, indicating that CODA’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CODA’s case, it is able to generate 0.58x cash from its debt capital.
Does CODA’s liquid assets cover its short-term commitments?
With current liabilities at US$4.12M, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.71x. Though, anything about 3x may be excessive, since CODA may be leaving too much capital in low-earning investments.
Does CODA face the risk of succumbing to its debt-load?
CODA is a relatively highly levered company with a debt-to-equity of 40.43%. 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 CODA’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 CODA, the ratio of 4.02x 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.
CODA’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. Since there is also no concerns around CODA’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 CODA has been performing in the past. You should continue to research Coda Octopus Group to get a better picture of the small-cap by looking at:
- 1. 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.
- 2. Historical Performance: What has CODA’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.
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.