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Investors are always looking for growth in small-cap stocks like Canvest Environmental Protection Group Company Limited (HKG:1381), with a market cap of HK$9.8b. However, an important fact which most ignore is: how financially healthy is the business? 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 a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 1381 here.
How does 1381’s operating cash flow stack up against its debt?
1381 has built up its total debt levels in the last twelve months, from HK$2.7b to HK$3.7b – this includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at HK$1.2b for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, 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 1381’s operating efficiency ratios such as ROA here.
Does 1381’s liquid assets cover its short-term commitments?
At the current liabilities level of HK$1.3b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.51x. Generally, for Renewable Energy companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is 1381’s debt level acceptable?
With debt reaching 73% of equity, 1381 may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether 1381 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 1381’s, case, the ratio of 6.16x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as 1381’s high interest coverage is seen as responsible and safe practice.
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1381’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how 1381 has been performing in the past. You should continue to research Canvest Environmental Protection Group to get a better picture of the small-cap by looking at: