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Is Covenant Transportation Group, Inc.'s (NASDAQ:CVTI) Balance Sheet Strong Enough To Weather A Storm?

Simply Wall St

Covenant Transportation Group, Inc. (NASDAQ:CVTI) is a small-cap stock with a market capitalization of US$271m. 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? Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, these checks don't give you a full picture, so I recommend you dig deeper yourself into CVTI here.

Does CVTI Produce Much Cash Relative To Its Debt?

CVTI has built up its total debt levels in the last twelve months, from US$214m to US$309m – this includes long-term debt. With this increase in debt, CVTI's cash and short-term investments stands at US$31m , ready to be used for running the business. Additionally, CVTI has produced cash from operations of US$97m over the same time period, resulting in an operating cash to total debt ratio of 31%, meaning that CVTI’s debt is appropriately covered by operating cash.

Can CVTI pay its short-term liabilities?

At the current liabilities level of US$133m, the company has been able to meet these commitments with a current assets level of US$226m, leading to a 1.7x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Transportation companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NasdaqGS:CVTI Historical Debt, July 22nd 2019

Does CVTI face the risk of succumbing to its debt-load?

CVTI is a relatively highly levered company with a debt-to-equity of 77%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if CVTI’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 CVTI, the ratio of 6.5x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as CVTI’s high interest coverage is seen as responsible and safe practice.

Next Steps:

Although CVTI’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 CVTI'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 CVTI has company-specific issues impacting its capital structure decisions. I suggest you continue to research Covenant Transportation Group to get a more holistic view of the small-cap by looking at:

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