Can Consolidated-Tomoka Land Co’s (CTO) Debt Pose A Serious Problem For The Company?

Author: Liz Campbell / Source: Simply Wall St

While small-cap stocks, such as Consolidated-Tomoka Land Co (AMEX:CTO) with its market cap of USD $311 Million, are popular for their explosive growth, investors should also pay heed to their balance sheet to judge whether the company can survive a downturn. The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone.

Apart from a major industry-downturn like in the energy sector, it can be anything from natural calamity; political unrest; economic collapse; labor-strike; supply-chain disruption; or even a major factory breakdown, which may test a company’s financial resilience. These factors make a basic understanding of a company’s financial position of utmost importance for a new investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength.

How does Consolidated-Tomoka Land’s operating cash flow stack against its overall debt?

At the end of the day, a company must pay bills and salaries, and must be able to invest in lucrative projects through cash. Firms have a certain amount of control over revenue recognition, which makes an analysis of its operating cash flow even more important. For Consolidated-Tomoka Land the ratio of operating cash flow to overall debt stands at 28.7%. This means that total debt is well covered by annual operating cash flow. I reckon an operating cash flow of at least 20% of overall debt for a company to be in a good financial shape.

 

Does CTO’s cash and short-term assets cover its short-term commitments?

There are many problems that come unannounced. For instance, a hurricane or even labor strikes. In 2011, a Tsunami and earthquake in Japan had wiped out a significant chunk…

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