【can you stack k&f filters】Are Covenant Transportation Group, Inc.’s (NASDAQ:CVTI) Interest Costs Too High?

Covenant Transportation Group,can you stack k&f filters Inc. (

NASDAQ:CVTI

) is a small-cap stock with a market capitalization of US$347m. 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 vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I’d encourage you to

dig deeper yourself into CVTI here

.

Does CVTI produce enough cash relative to debt?

CVTI’s debt levels surged from US$220m to US$236m over the last 12 months , which includes long-term debt. With this growth in debt, CVTI currently has US$20m remaining in cash and short-term investments , ready to deploy into the business. On top of this, CVTI has generated cash from operations of US$122m in the last twelve months, leading to an operating cash to total debt ratio of 52%, indicating that CVTI’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CVTI’s case, it is able to generate 0.52x cash from its debt capital.

Does CVTI’s liquid assets cover its short-term commitments?

At the current liabilities level of US$127m, the company has been able to meet these obligations given the level of current assets of US$192m, with a current ratio of 1.5x. For Transportation companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

NasdaqGS:CVTI Historical Debt January 2nd 19

Can CVTI service its debt comfortably?

With a debt-to-equity ratio of 72%, CVTI 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 CVTI 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 CVTI’s, case, the ratio of 6.35x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving CVTI ample headroom to grow its debt facilities.

Next Steps:

CVTI’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure CVTI has company-specific issues impacting its capital structure decisions. I recommend you continue to research Covenant Transportation Group to get a better picture of the small-cap by looking at:

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Future Outlook

: What are well-informed industry analysts predicting for CVTI’s future growth? Take a look at our

free research report of analyst consensus

for CVTI’s outlook.

Valuation

: What is CVTI 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 CVTI is currently mispriced by the market.

Other High-Performing Stocks

: Are there other stocks that provide better prospects with proven track records? Explore our

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.

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 protected]

.

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