Investors are always looking for growth in small-cap stocks like China Everbright Water Limited (SGX:U9E), with a market cap of S$950m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I recommend you dig deeper yourself into U9E here.

Does U9E produce enough cash relative to debt?

Over the past year, U9E has ramped up its debt from HK$5.2b to HK$7.1b , which comprises of short- and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at HK$2.2b , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of U9E’s operating efficiency ratios such as ROA here.

Can U9E pay its short-term liabilities?

With current liabilities at HK$4.2b, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.14x. Generally, for Water Utilities companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Can U9E service its debt comfortably?

With a debt-to-equity ratio of 78%, U9E can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In U9E’s case, the ratio of 4.64x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.

Next Steps:

U9E’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 an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for U9E’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research China Everbright Water to get a more holistic view of the stock by looking at: