What Investors Should Know About Zhejiang Tengy Environmental Technology Co., Ltd’s (HKG:1527) Financial Strength

Daisy Mock

Sun, Feb 17, 2019, 7:14 PM

Investors are always looking for growth in small-cap stocks like Zhejiang Tengy Environmental Technology Co., Ltd (HKG:1527), with a market cap of HK$532m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into 1527 here.

How much cash does 1527 generate through its operations?

1527’s debt level has been constant at around CN¥114m over the previous year . At this current level of debt, 1527 currently has CN¥58m remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can assess some of 1527’s operating efficiency ratios such as ROA here.

Can 1527 meet its short-term obligations with the cash in hand?

Looking at 1527’s CN¥823m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of CN¥1.4b, with a current ratio of 1.69x. Generally, for Machinery companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

SEHK:1527 Historical Debt February 18th 19

Can 1527 service its debt comfortably?

With debt at 16% of equity, 1527 may be thought of as appropriately levered. This range is considered safe as 1527 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if 1527’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 1527, the ratio of 28.93x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as 1527’s high interest coverage is seen as responsible and safe practice.

Next Steps:

1527 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for 1527’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Zhejiang Tengy Environmental Technology to get a better picture of the stock by looking at: