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Investors are always looking for growth in small-cap stocks like Dongwu Cement International Limited (HKG:695), with a market cap of HK$767m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 695 here.
Does 695 produce enough cash relative to debt?
695’s debt levels surged from CN¥57m to CN¥61m over the last 12 months made up of predominantly near term debt. With this increase in debt, 695’s cash and short-term investments stands at CN¥60m for investing into the business. On top of this, 695 has produced CN¥101m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 165%, meaning that 695’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 695’s case, it is able to generate 1.65x cash from its debt capital.
Does 695’s liquid assets cover its short-term commitments?
With current liabilities at CN¥185m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.44x. Usually, for Basic Materials companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is 695’s debt level acceptable?
With debt at 14% of equity, 695 may be thought of as appropriately levered. 695 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders.
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695’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how 695 has been performing in the past. I suggest you continue to research Dongwu Cement International to get a more holistic view of the stock by looking at:
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Future Outlook: What are well-informed industry analysts predicting for 695’s future growth? Take a look at our free research report of analyst consensus for 695’s outlook.
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Valuation: What is 695 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 695 is currently mispriced by the market.
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Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.