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Is CPI Aerostructures Inc’s (NYSEMKT:CVU) Balance Sheet A Threat To Its Future?

While small-cap stocks, such as CPI Aerostructures Inc (NYSEMKT:CVU) with its market cap of US$80m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into CVU here.

Does CVU produce enough cash relative to debt?

CVU has built up its total debt levels in the last twelve months, from US$34m to US$36m – this includes both the current and long-term debt. With this rise in debt, CVU currently has US$1m remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can assess some of CVU’s operating efficiency ratios such as ROA here.

Can CVU pay its short-term liabilities?

At the current liabilities level of US$44m liabilities, the company has been able to meet these obligations given the level of current assets of US$124m, with a current ratio of 2.84x. Generally, for Aerospace & Defense companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

AMEX:CVU Historical Debt October 11th 18

Can CVU service its debt comfortably?

With a debt-to-equity ratio of 46%, CVU can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if CVU’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 CVU, the ratio of 5.96x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as CVU’s high interest coverage is seen as responsible and safe practice.

Next Steps:

At its current level of cash flow coverage, CVU has room for improvement to better cushion for events which may require debt repayment. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how CVU has been performing in the past. You should continue to research CPI Aerostructures to get a better picture of the stock by looking at:

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

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 editorial-team@simplywallst.com.