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Columbus McKinnon Corporation (NASDAQ:CMCO) is a small-cap stock with a market capitalization of US$868m. 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 essential, 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. Nevertheless, potential investors would need to take a closer look, and I recommend you dig deeper yourself into CMCO here.
Does CMCO Produce Much Cash Relative To Its Debt?
CMCO has shrunk its total debt levels in the last twelve months, from US$411m to US$337m , which includes long-term debt. With this debt payback, CMCO's cash and short-term investments stands at US$59m , ready to be used for running the business. On top of this, CMCO has produced cash from operations of US$72m over the same time period, resulting in an operating cash to total debt ratio of 21%, indicating that CMCO’s debt is appropriately covered by operating cash.
Can CMCO pay its short-term liabilities?
With current liabilities at US$195m, it seems that the business has been able to meet these obligations given the level of current assets of US$348m, with a current ratio of 1.78x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Machinery companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is CMCO’s debt level acceptable?
CMCO is a relatively highly levered company with a debt-to-equity of 80%. 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 CMCO's case, the ratio of 5.52x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving CMCO ample headroom to grow its debt facilities.
CMCO’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 CMCO's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure CMCO has company-specific issues impacting its capital structure decisions. I suggest you continue to research Columbus McKinnon to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CMCO’s future growth? Take a look at our free research report of analyst consensus for CMCO’s outlook.
- Valuation: What is CMCO 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 CMCO is currently mispriced by the market.
- 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 firstname.lastname@example.org. 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.