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While small-cap stocks, such as Newton Resources Ltd (SEHK:1231) with its market cap of HK$3.44B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that 1231 is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into 1231 here.
Does 1231 generate an acceptable amount of cash through operations?
Over the past year, 1231 has reduced its debt from CN¥284.85M to CN¥223.63M . With this debt payback, 1231’s cash and short-term investments stands at CN¥406.58M , 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 1231’s operating efficiency ratios such as ROA here.
Can 1231 meet its short-term obligations with the cash in hand?
At the current liabilities level of CN¥321.69M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.5x. Usually, for Metals and Mining companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can 1231 service its debt comfortably?
With a debt-to-equity ratio of 52.32%, 1231 can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since 1231 is currently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
1231’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for 1231’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Newton Resources to get a better picture of the stock by looking at: