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Is CTT - Correios De Portugal, S.A.'s (ELI:CTT) Balance Sheet A Threat To Its Future?

Simply Wall St

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CTT - Correios De Portugal, S.A. (ELI:CTT) is a small-cap stock with a market capitalization of €376m. 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 vital, 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, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into CTT here.

Does CTT Produce Much Cash Relative To Its Debt?

Over the past year, CTT has ramped up its debt from €10m to €128m – this includes long-term debt. With this increase in debt, CTT's cash and short-term investments stands at €452m , ready to be used for running the business. On top of this, CTT has produced cash from operations of €34m during the same period of time, resulting in an operating cash to total debt ratio of 27%, indicating that CTT’s operating cash is sufficient to cover its debt.

Can CTT pay its short-term liabilities?

Looking at CTT’s €1.3b in current liabilities, it seems that the business may not have an easy time meeting these commitments with a current assets level of €684m, leading to a current ratio of 0.51x. The current ratio is calculated by dividing current assets by current liabilities.

ENXTLS:CTT Historical Debt, May 7th 2019

Can CTT service its debt comfortably?

With debt reaching 92% of equity, CTT may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In CTT's case, the ratio of 56.27x 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:

CTT’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 small-cap. This is only a rough assessment of financial health, and I'm sure CTT has company-specific issues impacting its capital structure decisions. I recommend you continue to research CTT - Correios De Portugal to get a better picture of the stock by looking at:

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