While small-cap stocks, such as CPI Computer Peripherals International (ATSE:CPI) with its market cap of €2.48M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Electronic companies, even ones that are profitable, are more likely to be higher risk. Assessing first and foremost the financial health is vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into CPI here.
Does CPI generate an acceptable amount of cash through operations?
CPI has sustained its debt level by about €1.87M over the last 12 months . At this current level of debt, CPI’s cash and short-term investments stands at €241.63K , ready to deploy into the business. Though, CPI is only producing €47.52K in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of less than 1x, indicating that the current level of operating cash is not enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CPI’s case, it produces less than 1x cash from its debt capital.
Can CPI pay its short-term liabilities?
At the current liabilities level of €4.24M liabilities, the company has been able to meet these obligations given the level of current assets of €6.19M, with a current ratio of 1.46x. Usually, for Electronic companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is CPI’s debt level acceptable?
With debt reaching 57.72% of equity, CPI may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether CPI 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 CPI’s, case, the ratio of 2.21x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
At its current level of cash flow coverage, CPI has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how CPI has been performing in the past. You should continue to research CPI Computer Peripherals International to get a better picture of the stock by looking at:
- 1. Historical Performance: What has CPI’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.
- 2. 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 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.