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While small-cap stocks, such as CECO Environmental Corp. (NASDAQ:CECE) with its market cap of US$309m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that CECE is not presently profitable, it’s vital to understand the current state of its operations and pathway to profitability. 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’d encourage you to dig deeper yourself into CECE here.
Does CECE Produce Much Cash Relative To Its Debt?
CECE has built up its total debt levels in the last twelve months, from US$90m to US$96m – this includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at US$28m to keep the business going. On top of this, CECE has generated US$5.0m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 5.2%, indicating that CECE’s current level of operating cash is not high enough to cover debt.
Can CECE meet its short-term obligations with the cash in hand?
At the current liabilities level of US$104m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.59x. The current ratio is calculated by dividing current assets by current liabilities. For Commercial Services companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is CECE’s debt level acceptable?
With debt reaching 47% of equity, CECE may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. However, since CECE is presently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although CECE’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for CECE's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research CECO Environmental to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CECE’s future growth? Take a look at our free research report of analyst consensus for CECE’s outlook.
- Valuation: What is CECE 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 CECE 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.