While small-cap stocks, such as Copper Strike Limited (ASX:CSE) with its market cap of AU$11m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that CSE is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into CSE here.
Does CSE produce enough cash relative to debt?
CSE has increased its debt level by about AU$4m over the last 12 months , which is mainly comprised of near term debt. With this ramp up in debt, CSE currently has AU$715k remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of CSE’s operating efficiency ratios such as ROA here.
Can CSE meet its short-term obligations with the cash in hand?
At the current liabilities level of AU$4m liabilities, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.17x.
Can CSE service its debt comfortably?
With a debt-to-equity ratio of 17%, CSE’s debt level may be seen as prudent. This range is considered safe as CSE is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. CSE’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
CSE’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. Furthermore, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure CSE has company-specific issues impacting its capital structure decisions. You should continue to research Copper Strike to get a more holistic view of the stock by looking at:
- Historical Performance: What has CSE’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.
- 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 firstname.lastname@example.org.