Investors are always looking for growth in small-cap stocks like Cabot Microelectronics Corporation (NASDAQ:CCMP), with a market cap of US$3.7b. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company's financial health becomes essential, as mismanagement of capital can lead to 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, this is not a comprehensive overview, so I recommend you dig deeper yourself into CCMP here.
Does CCMP Produce Much Cash Relative To Its Debt?
Over the past year, CCMP has ramped up its debt from US$141m to US$1.0b , which accounts for long term debt. With this increase in debt, CCMP's cash and short-term investments stands at US$209m , ready to be used for running the business. Additionally, CCMP has generated cash from operations of US$152m in the last twelve months, resulting in an operating cash to total debt ratio of 15%, indicating that CCMP’s debt is not covered by operating cash.
Does CCMP’s liquid assets cover its short-term commitments?
Looking at CCMP’s US$165m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.18x. The current ratio is the number you get when you divide current assets by current liabilities. Having said that, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Is CCMP’s debt level acceptable?
With total debt exceeding equity, CCMP is considered a highly levered company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 CCMP's case, the ratio of 45.39x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Although CCMP’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. Keep in mind I haven't considered other factors such as how CCMP has been performing in the past. I recommend you continue to research Cabot Microelectronics to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CCMP’s future growth? Take a look at our free research report of analyst consensus for CCMP’s outlook.
- Valuation: What is CCMP 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 CCMP 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.
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