Investors are always looking for growth in small-cap stocks like CITIC Envirotech Ltd (SGX:CEE), with a market cap of S$1.0b. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into CEE here.
How does CEE’s operating cash flow stack up against its debt?
CEE has sustained its debt level by about S$802m over the last 12 months comprising of short- and long-term debt. At this current level of debt, CEE currently has S$385m remaining in cash and short-term investments , ready to deploy into the business. Additionally, CEE has generated S$68m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 8.4%, indicating that CEE’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In CEE’s case, it is able to generate 0.084x cash from its debt capital.
Can CEE meet its short-term obligations with the cash in hand?
At the current liabilities level of S$1.3b liabilities, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.81x.
Does CEE face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 42%, CEE can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether CEE is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In CEE’s, case, the ratio of 7.13x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving CEE ample headroom to grow its debt facilities.
Next Steps:
CEE’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. Furthermore, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how CEE has been performing in the past. I suggest you continue to research CITIC Envirotech to get a more holistic view of the stock by looking at: