Connecture Inc (NASDAQ:CNXR) is a small-cap stock with a market capitalization of USD $4.12M. 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? A major downturn in the energy industry has resulted in over 150 companies going bankrupt and has put more than 100 on the verge of a collapse, primarily due to excessive debt. These factors make a basic understanding of a company’s financial position of utmost importance for a potential investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. See our latest analysis for CNXR
Does CNXR generate enough cash through operations?
There are many headwinds that come unannounced, such as natural disasters and political turmoil, which can challenge a small business and its ability to adapt and recover. These catastrophes does not mean the company can stop servicing its debt obligations. Fortunately, we can test the company’s capacity to pay back its debtholders without summoning any catastrophes by looking at how much cash it generates from its current operations. Last year, CNXR’s operating cash flow was -0.69x its current debt. This means what CNXR can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at CNXR’s operations at this point in time.
Can CNXR pay its short-term liabilities?
In addition to debtholders, a company must be able to pay its bills and salaries to keep the business running. As cash flow from operation is hindered by adverse events, CNXR may need to liquidate its short-term assets to meet these upcoming payments. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that CNXR is able to meet its upcoming commitments with its cash and other short-term assets, which lessens our concerns for the company’s business operations should any unfavourable circumstances arise.
Is CNXR’s level of debt at an acceptable level?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. For CNXR, the debt-to-equity ratio stands at above 100%, which means that it is a highly leveraged company. This is not a problem if the company has consistently grown its profits. But during a business downturn, as liquidity may dry up, making it hard to operate.
Are you a shareholder? With a high level of debt on its balance sheet, CNXR could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for CNXR to increase its operational efficiency. In addition to this, the company may struggle to meet its near term liabilities should an adverse event occur. In the future, its financial position may be different. I recommend keeping on top of market expectations for CNXR’s future growth on our free analysis platform.
Are you a potential investor? CNXR’s large debt ratio on top of low cash coverage of debt in addition to low liquidity coverage of short-term expenses may send potential investors running the other way. Though, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of CNXR’s track record. I encourage you to continue your research by taking a look at CNXR’s past performance analysis on our free platform to conclude on CNXR’s financial health.
To help readers see pass 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.