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What You Must Know About Canaf Investments Inc?s (CVE:CAF) Financial Strength
Armando Maloney July 13, 2018
Canaf Investments Inc (CVE:CAF) is a small-cap stock with a market capitalization of US$4.98m. 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? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into CAF here.
Does CAF produce enough cash relative to debt?
CAF?s debt levels have fallen from US$566.85k to US$271.61k over the last 12 months , which comprises of short- and long-term debt. With this debt payback, the current cash and short-term investment levels stands at US$315.41k , ready to deploy into the business. Moreover, CAF has generated cash from operations of US$536.73k during the same period of time, leading to an operating cash to total debt ratio of 197.61%, indicating that CAF?s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CAF?s case, it is able to generate 1.98x cash from its debt capital.
Does CAF?s liquid assets cover its short-term commitments?
At the current liabilities level of US$2.72m liabilities, the company has been able to meet these obligations given the level of current assets of US$4.36m, with a current ratio of 1.61x. Usually, for Metals and Mining 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.
TSXV:CAF Historical Debt July 12th 18
TSXV:CAF Historical Debt July 12th 18
Is CAF?s debt level acceptable?
CAF?s level of debt is appropriate relative to its total equity, at 10.45%. CAF is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether CAF 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 CAF?s, case, the ratio of 32.89x 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.
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