How Financially Strong Is Costain Group PLC (LON:COST)?
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Investors are always looking for growth in small-cap stocks like Costain Group PLC (LON:COST), with a market cap of UK£359m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, this is just a partial view of the stock, and I recommend you dig deeper yourself into COST here.
Does COST Produce Much Cash Relative To Its Debt?
COST has sustained its debt level by about UK£71m over the last 12 months – this includes long-term debt. At this current level of debt, COST currently has UK£189m remaining in cash and short-term investments , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. For this article’s sake, I won’t be looking at this today, but you can take a look at some of COST’s operating efficiency ratios such as ROA here.
Can COST pay its short-term liabilities?
At the current liabilities level of UK£327m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.43x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Construction companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is COST’s debt level acceptable?
With a debt-to-equity ratio of 39%, COST's debt level may be seen as prudent. COST is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if COST’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For COST, the ratio of 19x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
COST has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I'm sure COST has company-specific issues impacting its capital structure decisions. I recommend you continue to research Costain Group to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for COST’s future growth? Take a look at our free research report of analyst consensus for COST’s outlook.
Valuation: What is COST 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 COST is currently mispriced by the market.
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.
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