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What Does Capital Power Corporation's (TSE:CPX) Balance Sheet Tell Us About It?

Simply Wall St

Capital Power Corporation (TSE:CPX) is a small-cap stock with a market capitalization of CA$3.1b. 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, as mismanagement of capital can lead to 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. However, this is just a partial view of the stock, and I suggest you dig deeper yourself into CPX here.

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Does CPX Produce Much Cash Relative To Its Debt?

CPX has built up its total debt levels in the last twelve months, from CA$2.1b to CA$2.5b , which includes long-term debt. With this rise in debt, CPX currently has CA$90m remaining in cash and short-term investments to keep the business going. On top of this, CPX has generated cash from operations of CA$593m in the last twelve months, leading to an operating cash to total debt ratio of 24%, meaning that CPX’s current level of operating cash is high enough to cover debt.

Can CPX pay its short-term liabilities?

At the current liabilities level of CA$646m, it appears that the company may not have an easy time meeting these commitments with a current assets level of CA$613m, leading to a current ratio of 0.95x. The current ratio is the number you get when you divide current assets by current liabilities.

TSX:CPX Historical Debt, May 20th 2019

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

With a debt-to-equity ratio of 82%, CPX can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether CPX 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 CPX's, case, the ratio of 2.92x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as CPX’s low interest coverage already puts the company at higher risk of default.

Next Steps:

Although CPX’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven't considered other factors such as how CPX has been performing in the past. I suggest you continue to research Capital Power to get a better picture of the stock by looking at:

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