What Investors Should Know About Celestica Inc’s (TSE:CLS) Financial Strength
Celestica Inc (TSE:CLS) is a small-cap stock with a market capitalization of CA$2.0b. 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? Companies operating in the Electronic industry, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is essential. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I suggest you dig deeper yourself into CLS here.
How does CLS’s operating cash flow stack up against its debt?
CLS has built up its total debt levels in the last twelve months, from US$220m to US$355m , which comprises of short- and long-term debt. With this increase in debt, CLS’s cash and short-term investments stands at US$401m for investing into the business. Additionally, CLS has generated US$16m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 4.5%, signalling that CLS’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CLS’s case, it is able to generate 0.045x cash from its debt capital.
Can CLS pay its short-term liabilities?
With current liabilities at US$1.4b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.87x. Usually, for Electronic companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does CLS face the risk of succumbing to its debt-load?
With debt at 28% of equity, CLS may be thought of as appropriately levered. CLS is not taking on too much debt commitment, which may be constraining for future growth. We can test if CLS’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 CLS, the ratio of 12.6x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as CLS’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although CLS’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how CLS has been performing in the past. You should continue to research Celestica to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for CLS’s future growth? Take a look at our free research report of analyst consensus for CLS’s outlook.
Valuation: What is CLS 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 CLS 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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
