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Investors are always looking for growth in small-cap stocks like China Environmental Technology and Bioenergy Holdings Limited (SEHK:1237), with a market cap of HK$401.48M. However, an important fact which most ignore is: how financially healthy is the business? Since 1237 is loss-making right now, it’s vital to understand the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into 1237 here.
How does 1237’s operating cash flow stack up against its debt?
Over the past year, 1237 has reduced its debt from CN¥414.25M to CN¥249.98M , which is made up of current and long term debt. With this debt repayment, the current cash and short-term investment levels stands at CN¥113.50M , ready to deploy into the business. Moreover, 1237 has generated CN¥47.52M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 19.01%, meaning that 1237’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making companies since metrics such as return on asset (ROA) requires positive earnings. In 1237’s case, it is able to generate 0.19x cash from its debt capital.
Does 1237’s liquid assets cover its short-term commitments?
Looking at 1237’s most recent CN¥324.47M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of CN¥721.15M, with a current ratio of 2.22x. Generally, for Leisure companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is 1237’s debt level acceptable?
1237’s level of debt is appropriate relative to its total equity, at 22.11%. 1237 is not taking on too much debt commitment, which may be constraining for future growth. Investors’ risk associated with debt is very low with 1237, and the company has plenty of headroom and ability to raise debt should it need to in the future.
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1237’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 proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for 1237’s financial health. Other important fundamentals need to be considered alongside. You should continue to research China Environmental Technology and Bioenergy Holdings to get a better picture of the stock by looking at: