Chongherr Investments Ltd (ASX:CDH) is a small-cap stock with a market capitalization of A$651.04K. 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 evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so 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 A$0.3M to A$0.1M , which is mainly comprised of near term debt. With this debt repayment, the current cash and short-term investment levels stands at A$0.0M for investing into the business. Moreover, CDH has generated A$0.3M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 375.33%, signalling that CDH’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In CDH’s case, it is able to generate 3.75x cash from its debt capital.
Can CDH pay its short-term liabilities?
At the current liabilities level of A$0.4M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of A$0.7M, with a current ratio of 1.62x. 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.
Is CDH’s debt level acceptable?With debt at 3.42% of equity, CDH may be thought of as having low leverage. This range is considered safe as CDH is not taking on too much debt obligation, which may be constraining for future growth. 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. 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 CDH’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Chongherr Investments to get a better picture of the stock by looking at:
1. 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.
2. 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.
3. 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.