Investors are always looking for growth in small-cap stocks like Consolidated-Tomoka Land Co (NYSEMKT:CTO), with a market cap of US$355.49m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes crucial, 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, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into CTO here.

How does CTO’s operating cash flow stack up against its debt?

CTO’s debt level has been constant at around US$177.13m over the previous year – this includes both the current and long-term debt. At this current level of debt, CTO currently has US$5.23m remaining in cash and short-term investments for investing into the business. Moreover, CTO has produced US$26.51m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 14.97%, meaning that CTO’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CTO’s case, it is able to generate 0.15x cash from its debt capital.

Can CTO meet its short-term obligations with the cash in hand?

Looking at CTO’s most recent US$5.51m liabilities, it appears that the company has been able to meet these commitments with a current assets level of US$56.40m, leading to a 10.24x current account ratio. However, anything about 3x may be excessive, since CTO may be leaving too much capital in low-earning investments.

Is CTO’s debt level acceptable?

With a debt-to-equity ratio of 85.48%, CTO 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. We can check to see whether CTO 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 CTO’s, case, the ratio of 2.76x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as CTO’s low interest coverage already puts the company at higher risk of default.

Next Steps:

CTO’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how CTO has been performing in the past. You should continue to research Consolidated-Tomoka Land to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for CTO’s future growth? Take a look at our free research report of analyst consensus for CTO’s outlook.

2. Valuation: What is CTO 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 CTO is currently mispriced by the market.

3. 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.