While small-cap stocks, such as China Agroforestry Low-Carbon Holdings Limited (SEHK:1069) with its market cap of HK$352.78M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that 1069 is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into 1069 here.
Does 1069 generate an acceptable amount of cash through operations?
1069 has built up its total debt levels in the last twelve months, from CN¥132.6M to CN¥237.7M , which comprises of short- and long-term debt. With this rise in debt, 1069 currently has CN¥35.9M remaining in cash and short-term investments , ready to deploy into the business. However, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of 1069’s operating efficiency ratios such as ROA here.
Can 1069 meet its short-term obligations with the cash in hand?
Looking at 1069’s most recent CN¥89.5M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.18x. Usually, for forestry companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can 1069 service its debt comfortably?
1069 is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since 1069 is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Are you a shareholder? 1069’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, its high liquidity means the company should continue to operate smoothly in the case of adverse events. Given that its financial position may change. You should always be researching market expectations for 1069’s future growth on our free analysis platform.