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China Ruifeng Renewable Energy Holdings Limited (SEHK:527) is a small-cap stock with a market capitalization of HK$1.24B. 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? Given that 527 is not presently profitable, it’s vital to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into 527 here.
How does 527’s operating cash flow stack up against its debt?
527’s debt levels have fallen from CN¥1.55B to CN¥1.36B over the last 12 months , which comprises of short- and long-term debt. With this debt repayment, 527’s cash and short-term investments stands at CN¥105.51M for investing into the business. On top of this, 527 has generated CN¥220.18M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 16.23%, indicating that 527’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for loss making businesses since metrics such as return on asset (ROA) requires a positive net income. In 527’s case, it is able to generate 0.16x cash from its debt capital.
Does 527’s liquid assets cover its short-term commitments?
Looking at 527’s most recent CN¥637.83M liabilities, it seems that the business has been able to meet these commitments with a current assets level of CN¥684.10M, leading to a 1.07x current account ratio. Generally, for Renewable Energy companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does 527 face the risk of succumbing to its debt-load?
527 is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since 527 is currently unprofitable, there’s a question of sustainability of its current operations. 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:
527’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure 527 has company-specific issues impacting its capital structure decisions. I suggest you continue to research China Ruifeng Renewable Energy Holdings to get a better picture of the stock by looking at: