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Clean Harbors, Inc. ( NYSE:CLH ) is a small-cap stock with a market capitalization of US$3.7b. 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? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, these checks don't give you a full picture, so I suggest you dig deeper yourself into CLH here .
CLH’s Debt (And Cash Flows)
Over the past year, CLH has ramped up its debt from US$1.6b to US$1.7b , which accounts for long term debt. With this increase in debt, CLH currently has US$225m remaining in cash and short-term investments , ready to be used for running the business. On top of this, CLH has generated cash from operations of US$351m over the same time period, leading to an operating cash to total debt ratio of 20%, indicating that CLH’s current level of operating cash is high enough to cover debt.
Can CLH meet its short-term obligations with the cash in hand?
At the current liabilities level of US$598m, it seems that the business has been able to meet these obligations given the level of current assets of US$1.1b, with a current ratio of 1.92x. The current ratio is calculated by dividing current assets by current liabilities. For Commercial Services companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Is CLH’s debt level acceptable?
Since total debt levels exceed equity, CLH is a highly leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if CLH’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For CLH, the ratio of 2.37x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
CLH’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. Since there is also no concerns around CLH's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how CLH has been performing in the past. I suggest you continue to research Clean Harbors to get a more holistic view of the small-cap by looking at:
- Future Outlook : What are well-informed industry analysts predicting for CLH’s future growth? Take a look at our free research report of analyst consensus for CLH’s outlook.
- Valuation : What is CLH 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 CLH 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 .
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org . This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.