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While small-cap stocks, such as CGN New Energy Holdings Co Ltd. (SEHK:1811) with its market cap of HK$5.71B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes essential, 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. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into 1811 here.
How does 1811’s operating cash flow stack up against its debt?
Over the past year, 1811 has maintained its debt levels at around US$2.40B made up of current and long term debt. At this constant level of debt, 1811 currently has US$242.83M remaining in cash and short-term investments for investing into the business. Moreover, 1811 has generated cash from operations of US$283.05M in the last twelve months, resulting in an operating cash to total debt ratio of 11.79%, signalling that 1811’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 1811’s case, it is able to generate 0.12x cash from its debt capital.
Can 1811 pay its short-term liabilities?
Looking at 1811’s most recent US$850.65M liabilities, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.92x, which is below the prudent industry ratio of 3x.
Does 1811 face the risk of succumbing to its debt-load?
1811 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 1811’s case, the ratio of 1.7x 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:
1811’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how 1811 has been performing in the past. I suggest you continue to research CGN New Energy Holdings to get a more holistic view of the stock by looking at: