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Cubic Corporation (NYSE:CUB) is a small-cap stock with a market capitalization of US$2.1b. 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? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into CUB here.
CUB’s Debt (And Cash Flows)
Over the past year, CUB has ramped up its debt from US$277m to US$444m , which accounts for long term debt. With this increase in debt, CUB's cash and short-term investments stands at US$43m , ready to be used for running the business. Moving on, operating cash flow was negative over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can examine some of CUB’s operating efficiency ratios such as ROA here.
Can CUB pay its short-term liabilities?
At the current liabilities level of US$524m, it appears that the company has been able to meet these obligations given the level of current assets of US$709m, with a current ratio of 1.35x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Aerospace & Defense companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does CUB face the risk of succumbing to its debt-load?
CUB is a relatively highly levered company with a debt-to-equity of 47%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if CUB’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 CUB, the ratio of 2.03x 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.
CUB’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around CUB's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for CUB's financial health. Other important fundamentals need to be considered alongside. You should continue to research Cubic to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CUB’s future growth? Take a look at our free research report of analyst consensus for CUB’s outlook.
- Valuation: What is CUB 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 CUB 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.