In This Article:
While small-cap stocks, such as Dynagreen Environmental Protection Group Co Ltd (HKG:1330) with its market cap of HK$15.46b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. 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’d encourage you to dig deeper yourself into 1330 here.
How much cash does 1330 generate through its operations?
Over the past year, 1330 has ramped up its debt from CN¥3.46b to CN¥4.08b – this includes both the current and long-term debt. With this increase in debt, 1330’s cash and short-term investments stands at CN¥841.7m for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, 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 take a look at some of 1330’s operating efficiency ratios such as ROA here.
Does 1330’s liquid assets cover its short-term commitments?
Looking at 1330’s most recent CN¥1.18b liabilities, the company has been able to meet these commitments with a current assets level of CN¥1.26b, leading to a 1.07x current account ratio. For Commercial Services companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Is 1330’s debt level acceptable?
1330 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. 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 1330’s case, the ratio of 2.4x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
1330’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. 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 1330’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Dynagreen Environmental Protection Group to get a better picture of the stock by looking at: