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While small-cap stocks, such as Greentech Technology International Limited (HKG:195) with its market cap of HK$546m, 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 essential, 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. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into 195 here.
How does 195’s operating cash flow stack up against its debt?
195’s debt levels have fallen from HK$105m to HK$96m over the last 12 months , which is mainly comprised of near term debt. With this reduction in debt, the current cash and short-term investment levels stands at HK$170m for investing into the business. On top of this, 195 has produced cash from operations of HK$112m during the same period of time, leading to an operating cash to total debt ratio of 117%, indicating that 195’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 195’s case, it is able to generate 1.17x cash from its debt capital.
Can 195 meet its short-term obligations with the cash in hand?
At the current liabilities level of HK$206m, it seems that the business has been able to meet these obligations given the level of current assets of HK$264m, with a current ratio of 1.29x. Usually, for Metals and Mining 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.
Can 195 service its debt comfortably?
With debt at 18% of equity, 195 may be thought of as appropriately levered. 195 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if 195’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 195, the ratio of 4.8x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as 195’s high interest coverage is seen as responsible and safe practice.
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195’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 will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how 195 has been performing in the past. I suggest you continue to research Greentech Technology International to get a more holistic view of the stock by looking at: