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CRA International, Inc. (NASDAQ:CRAI) is a small-cap stock with a market capitalization of US$335m. 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 just a partial view of the stock, and I suggest you dig deeper yourself into CRAI here.
CRAI’s Debt (And Cash Flows)
Over the past year, CRAI has ramped up its debt from US$10m to US$143m , which accounts for long term debt. With this increase in debt, CRAI currently has US$15m remaining in cash and short-term investments to keep the business going. On top of this, CRAI has generated cash from operations of US$20m over the same time period, leading to an operating cash to total debt ratio of 14%, meaning that CRAI’s operating cash is less than its debt.
Does CRAI’s liquid assets cover its short-term commitments?
With current liabilities at US$149m, the company has been able to meet these obligations given the level of current assets of US$167m, with a current ratio of 1.12x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Professional Services companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is CRAI’s debt level acceptable?
CRAI is a relatively highly levered company with a debt-to-equity of 73%. 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 check to see whether CRAI 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 CRAI's, case, the ratio of 46.45x 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.
CRAI’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. Since there is also no concerns around CRAI'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 CRAI has been performing in the past. I recommend you continue to research CRA International to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CRAI’s future growth? Take a look at our free research report of analyst consensus for CRAI’s outlook.
- Valuation: What is CRAI 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 CRAI 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.
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 firstname.lastname@example.org. 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.