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Is Copa Holdings, S.A.'s (NYSE:CPA) Balance Sheet A Threat To Its Future?

Simply Wall St

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Mid-caps stocks, like Copa Holdings, S.A. (NYSE:CPA) with a market capitalization of US$3.8b, aren’t the focus of most investors who prefer to direct their investments towards either large-cap or small-cap stocks. Despite this, commonly overlooked mid-caps have historically produced better risk-adjusted returns than their small and large-cap counterparts. Let’s take a look at CPA’s debt concentration and assess their financial liquidity to get an idea of their ability to fund strategic acquisitions and grow through cyclical pressures. Note that this information is centred entirely on financial health and is a top-level understanding, so I encourage you to look further into CPA here.

See our latest analysis for Copa Holdings

Does CPA Produce Much Cash Relative To Its Debt?

CPA has built up its total debt levels in the last twelve months, from US$1.1b to US$1.7b , which includes long-term debt. With this increase in debt, CPA currently has US$768m remaining in cash and short-term investments to keep the business going. Additionally, CPA has generated cash from operations of US$409m over the same time period, resulting in an operating cash to total debt ratio of 24%, indicating that CPA’s operating cash is sufficient to cover its debt.

Does CPA’s liquid assets cover its short-term commitments?

At the current liabilities level of US$1.2b, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.95x. The current ratio is calculated by dividing current assets by current liabilities.

NYSE:CPA Historical Debt, June 4th 2019

Can CPA service its debt comfortably?

With a debt-to-equity ratio of 93%, CPA can be considered as an above-average leveraged company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether CPA 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 CPA's, case, the ratio of 22.56x suggests that interest is comfortably 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.

Next Steps:

CPA’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 low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. I admit this is a fairly basic analysis for CPA's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Copa Holdings to get a more holistic view of the stock by looking at:

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

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.