Investors are always looking for growth in small-cap stocks like Card Factory plc (LON:CARD), with a market cap of UK£658.8m. However, an important fact which most ignore is: how financially healthy is the business? Specialty Retail businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into CARD here.
Does CARD produce enough cash relative to debt?
CARD’s debt levels surged from UK£138.2m to UK£164.5m over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at UK£3.6m , ready to deploy into the business. On top of this, CARD has produced UK£72.7m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 44.2%, indicating that CARD’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CARD’s case, it is able to generate 0.44x cash from its debt capital.
Can CARD meet its short-term obligations with the cash in hand?
At the current liabilities level of UK£65.1m liabilities, the company has been able to meet these commitments with a current assets level of UK£72.0m, leading to a 1.11x current account ratio. Usually, for Specialty Retail companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is CARD’s debt level acceptable?
With a debt-to-equity ratio of 75.3%, CARD can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether CARD is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In CARD’s, case, the ratio of 30.89x 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.
CARD’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 CARD’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 CARD has been performing in the past. I recommend you continue to research Card Factory to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CARD’s future growth? Take a look at our free research report of analyst consensus for CARD’s outlook.
- Valuation: What is CARD 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 CARD 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 email@example.com.