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Copa Holdings, S.A. (NYSE:CPA) is a small-cap stock with a market capitalization of US$3.5b. 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? Understanding the company's financial health becomes 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, potential investors would need to take a closer look, and I suggest you dig deeper yourself into CPA here.
CPA’s Debt (And Cash Flows)
CPA has built up its total debt levels in the last twelve months, from US$1.2b to US$1.3b – this includes long-term debt. With this rise in debt, CPA's cash and short-term investments stands at US$722m to keep the business going. Moreover, CPA has produced US$437m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 34%, indicating that CPA’s operating cash is sufficient to cover its debt.
Can CPA pay its short-term liabilities?
At the current liabilities level of US$1.0b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.02x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Airlines companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is CPA’s debt level acceptable?
CPA is a relatively highly levered company with a debt-to-equity of 70%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if CPA’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 CPA, the ratio of 27.3x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving CPA ample headroom to grow its debt facilities.
CPA’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 CPA's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how CPA has been performing in the past. I recommend you continue to research Copa Holdings to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CPA’s future growth? Take a look at our free research report of analyst consensus for CPA’s outlook.
- Valuation: What is CPA 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 CPA 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.