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What does Cosan Limited’s (NYSE:CZZ) Balance Sheet Tell Us About Its Future?

Willa Russo

Cosan Limited (NYSE:CZZ) is a small-cap stock with a market capitalization of US$1.62b. 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? Oil and Gas companies, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into CZZ here.

How much cash does CZZ generate through its operations?

CZZ has sustained its debt level by about R$24.23b over the last 12 months comprising of short- and long-term debt. At this stable level of debt, CZZ’s cash and short-term investments stands at R$7.88b , ready to deploy into the business. Moreover, CZZ has generated cash from operations of R$5.07b over the same time period, leading to an operating cash to total debt ratio of 20.9%, signalling that CZZ’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CZZ’s case, it is able to generate 0.21x cash from its debt capital.

Can CZZ pay its short-term liabilities?

With current liabilities at R$7.28b, it appears that the company has been able to meet these obligations given the level of current assets of R$11.51b, with a current ratio of 1.58x. For Oil and Gas companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

NYSE:CZZ Historical Debt September 5th 18

Is CZZ’s debt level acceptable?

CZZ is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. 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 after interest and tax at least three times its net interest payments is considered financially sound. In CZZ’s case, the ratio of 1.51x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.

Next Steps:

CZZ’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure CZZ has company-specific issues impacting its capital structure decisions. You should continue to research Cosan to get a more holistic view of the stock by looking at:

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

To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.