Is Comvita Limited's (NZSE:CVT) Balance Sheet A Threat To Its Future?
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Comvita Limited (NZSE:CVT) is a small-cap stock with a market capitalization of NZ$190m. 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 vital, 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, this is not a comprehensive overview, so I recommend you dig deeper yourself into CVT here.
CVT’s Debt (And Cash Flows)
Over the past year, CVT has ramped up its debt from NZ$87m to NZ$112m – this includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at NZ$8.0m to keep the business going. Moreover, CVT has generated NZ$1.6m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 1.5%, signalling that CVT’s current level of operating cash is not high enough to cover debt.
Can CVT pay its short-term liabilities?
At the current liabilities level of NZ$28m, it seems that the business has been able to meet these commitments with a current assets level of NZ$192m, leading to a 6.91x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Can CVT service its debt comfortably?
CVT is a relatively highly levered company with a debt-to-equity of 60%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 CVT's case, the ratio of 0.24x 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:
Although CVT’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 CVT'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 CVT has been performing in the past. I suggest you continue to research Comvita to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for CVT’s future growth? Take a look at our free research report of analyst consensus for CVT’s outlook.
Valuation: What is CVT 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 CVT 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.
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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.
