While small-cap stocks, such as California Water Service Group (NYSE:CWT) with its market cap of US$2.4b, 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 essential, 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. Nevertheless, this is not a comprehensive overview, so I recommend you dig deeper yourself into CWT here.
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Does CWT Produce Much Cash Relative To Its Debt?
Over the past year, CWT has ramped up its debt from US$797m to US$955m – this includes long-term debt. With this increase in debt, CWT's cash and short-term investments stands at US$60m , ready to be used for running the business. Moreover, CWT has produced cash from operations of US$171m in the last twelve months, leading to an operating cash to total debt ratio of 18%, meaning that CWT’s current level of operating cash is not high enough to cover debt.
Does CWT’s liquid assets cover its short-term commitments?
Looking at CWT’s US$384m in current liabilities, it seems that the business may not have an easy time meeting these commitments with a current assets level of US$193m, leading to a current ratio of 0.5x. The current ratio is calculated by dividing current assets by current liabilities.
Is CWT’s debt level acceptable?
CWT is a highly-leveraged company with debt exceeding equity by over 100%. 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 CWT 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 CWT's, case, the ratio of 2.61x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as CWT’s low interest coverage already puts the company at higher risk of default.
CWT’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. But, 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 CWT has company-specific issues impacting its capital structure decisions. You should continue to research California Water Service Group to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CWT’s future growth? Take a look at our free research report of analyst consensus for CWT’s outlook.
- Historical Performance: What has CWT'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.
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