Chongherr Investments Ltd (ASX:CDH) is a small-cap stock with a market capitalization of AU$520.83k. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Given that CDH 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. Nevertheless, I know these factors are very high-level, so I suggest you 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 made up of predominantly near term debt. With this debt payback, CDH’s cash and short-term investments stands at AU$70.66k for investing into the business. Though, CDH is only producing cash from operations of AU$80.59k in the last twelve months, resulting in an operating cash to total debt ratio of less than 1x, indicating that debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for loss making businesses since metrics such as return on asset (ROA) requires positive earnings. In CDH’s case, it generates less than 1x cash from its debt capital.
Can CDH pay its short-term liabilities?
At the current liabilities level of AU$398.46k liabilities, it seems that the business has been able to meet these commitments with a current assets level of AU$591.45k, leading to a 1.48x current account ratio. Generally, for Basic Materials companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is CDH’s debt level acceptable?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 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 exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how CDH has been performing in the past. I recommend you continue to research Chongherr Investments to get a better picture 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.