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Investors are always looking for growth in small-cap stocks like Carter's, Inc. (NYSE:CRI), with a market cap of US$4.2b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, potential investors would need to take a closer look, and I suggest you dig deeper yourself into CRI here.
CRI’s Debt (And Cash Flows)
CRI has built up its total debt levels in the last twelve months, from US$618m to US$1.5b – this includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$160m , ready to be used for running the business. Moreover, CRI has generated cash from operations of US$329m over the same time period, leading to an operating cash to total debt ratio of 22%, signalling that CRI’s debt is appropriately covered by operating cash.
Can CRI pay its short-term liabilities?
With current liabilities at US$362m, the company has been able to meet these commitments with a current assets level of US$971m, leading to a 2.68x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Luxury companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does CRI face the risk of succumbing to its debt-load?
CRI is a relatively highly levered company with a debt-to-equity of 74%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In CRI's case, the ratio of 11.05x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as CRI’s high interest coverage is seen as responsible and safe practice.
CRI’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 CRI's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure CRI has company-specific issues impacting its capital structure decisions. You should continue to research Carter's to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CRI’s future growth? Take a look at our free research report of analyst consensus for CRI’s outlook.
- Valuation: What is CRI 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 CRI 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 firstname.lastname@example.org. 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.