How Financially Strong Is Cannindah Resources Limited (ASX:CAE)?
Cannindah Resources Limited (ASX:CAE) is a small-cap stock with a market capitalization of AU$5.51M. 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? Given that CAE is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into CAE here.
Does CAE generate an acceptable amount of cash through operations?
CAE’s debt levels surged from AU$1.81M to AU$2.46M over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, CAE currently has AU$318.48K remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of CAE’s operating efficiency ratios such as ROA here.
Can CAE pay its short-term liabilities?
Looking at CAE’s most recent AU$2.78M liabilities, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.16x, which is below the prudent industry ratio of 3x.
Is CAE’s debt level acceptable?
With total debt exceeding equities, CAE is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since CAE is currently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
CAE’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, 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 CAE has been performing in the past. I recommend you continue to research Cannindah Resources to get a more holistic view of the stock by looking at:
1. Historical Performance: What has CAE’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.
