Yahoo Finance What does CLS Holdings plc’s (LON:CLI) Balance Sheet Tell Us About Its Future?
While small-cap stocks, such as CLS Holdings plc (LON:CLI) with its market cap of UK£969.60m, 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 vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into CLI here.
Does CLI produce enough cash relative to debt?
CLI has built up its total debt levels in the last twelve months, from UK£859.70m to UK£0 – this includes both the current and long-term debt. With this growth in debt, CLI currently has UK£146.70m remaining in cash and short-term investments for investing into the business. Moreover, CLI has produced UK£43.20m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 4.72%, 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 0.047x cash from its debt capital.
Does CLI’s liquid assets cover its short-term commitments?
Looking at CLI’s most recent UK£177.50m liabilities, it seems that the business has not been able to meet these commitments with a current assets level of UK£174.70m, leading to a 0.98x current account ratio. which is under the appropriate industry ratio of 3x.
Can CLI service its debt comfortably?
With a debt-to-equity ratio of 88.63%, CLI can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. 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 after interest and tax at least three times its net interest payments is considered financially sound. In CLI’s case, the ratio of 4.34x 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:
CLI’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, 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. You should continue to research CLS Holdings to get a better picture of the stock by looking at:
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.
Historical Performance: What has CLI’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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 pass 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.
