While small-cap stocks, such as Cargojet Inc (TSX:CJT) with its market cap of CA$879.27M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into CJT here.
Does CJT generate an acceptable amount of cash through operations?
Over the past year, CJT has ramped up its debt from CA$347.30M to CA$400.50M – this includes both the current and long-term debt. With this increase in debt, CJT currently has CA$5.70M remaining in cash and short-term investments , ready to deploy into the business. On top of this, CJT has generated cash from operations of CA$78.70M over the same time period, resulting in an operating cash to total debt ratio of 19.65%, indicating that CJT’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CJT’s case, it is able to generate 0.2x cash from its debt capital.
Can CJT meet its short-term obligations with the cash in hand?
With current liabilities at CA$104.50M, the company is not able to meet these obligations given the level of current assets of CA$54.40M, with a current ratio of 0.52x below the prudent level of 3x.
Does CJT face the risk of succumbing to its debt-load?
CJT 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. We can test if CJT’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 CJT, the ratio of 2.43x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as CJT’s low interest coverage already puts the company at higher risk of default.
CJT’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I’m sure CJT has company-specific issues impacting its capital structure decisions. You should continue to research Cargojet to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CJT’s future growth? Take a look at our free research report of analyst consensus for CJT’s outlook.
- Valuation: What is CJT 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 CJT 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.
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.