Yahoo Finance Is CLS Holdings plc’s (LON:CLI) Balance Sheet A Threat To Its Future?
While small-cap stocks, such as CLS Holdings plc (LON:CLI) with its market cap of UK£892m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, 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. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into CLI here.
How much cash does CLI generate through its operations?
CLI’s debt levels surged from UK£827m to UK£948m over the last 12 months , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at UK£137m , ready to deploy into the business. On top of this, CLI has produced UK£39m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 4.1%, indicating that CLI’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CLI’s case, it is able to generate 0.041x cash from its debt capital.
Can CLI pay its short-term liabilities?
At the current liabilities level of UK£197m, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.88x.
Can CLI service its debt comfortably?
With debt reaching 89% of equity, CLI may be thought of as relatively highly levered. 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 CLI 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 CLI’s, case, the ratio of 4.19x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving CLI ample headroom to grow its debt facilities.
Next Steps:
Although CLI’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for CLI’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research CLS Holdings to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for CLI’s future growth? Take a look at our free research report of analyst consensus for CLI’s outlook.
Valuation: What is CLI 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 CLI 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.
