While small-cap stocks, such as Chongherr Investments Ltd (ASX:CDH) with its market cap of AU$520.83K, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since CDH is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into CDH here.
How does CDH’s operating cash flow stack up against its debt?
CDH has shrunken its total debt levels in the last twelve months, from AU$77.03K to AU$28.24K , which is mainly comprised of near term debt. With this debt repayment, CDH’s cash and short-term investments stands at AU$70.66K , ready to deploy into the business. Though, CDH is only generating AU$80.59K in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of less than 1x, meaning that its operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires positive earnings. In CDH’s case, it produces less than 1x cash from its debt capital.
Can CDH meet its short-term obligations with the cash in hand?
Looking at CDH’s most recent AU$398.46K liabilities, it appears that the company has been able to meet these obligations given the level of current assets of AU$591.45K, with a current ratio of 1.48x. Generally, for Basic Materials 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.
Does CDH face the risk of succumbing to its debt-load?With a debt-to-equity ratio of 1.75%, CDH’s debt level is relatively low. CDH is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. CDH’s risk around capital structure is almost non-existent, and the company has the headroom and ability to raise debt should it need to in the future.
CDH’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 exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how CDH has been performing in the past. You should continue to research Chongherr Investments to get a more holistic view of the stock by looking at:
- Valuation: What is CDH worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CDH is currently mispriced by the market.
- Historical Performance: What has CDH’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.