While small-cap stocks, such as Datang Environment Industry Group Co., Ltd. (HKG:1272) with its market cap of HK$5.8b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, these checks don’t give you a full picture, so I’d encourage you to dig deeper yourself into 1272 here.
Does 1272 Produce Much Cash Relative To Its Debt?
1272 has built up its total debt levels in the last twelve months, from CN¥4.3b to CN¥4.9b , which accounts for long term debt. With this rise in debt, 1272’s cash and short-term investments stands at CN¥1.7b to keep the business going. Moreover, 1272 has generated cash from operations of CN¥488m during the same period of time, resulting in an operating cash to total debt ratio of 9.9%, signalling that 1272’s current level of operating cash is not high enough to cover debt.
Does 1272’s liquid assets cover its short-term commitments?
Looking at 1272’s CN¥10b in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of CN¥12b, leading to a 1.19x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Commercial Services companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Is 1272’s debt level acceptable?
With debt reaching 67% of equity, 1272 may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 1272’s case, the ratio of 5.08x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as 1272’s high interest coverage is seen as responsible and safe practice.
1272’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. This is only a rough assessment of financial health, and I’m sure 1272 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Datang Environment Industry Group to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1272’s future growth? Take a look at our free research report of analyst consensus for 1272’s outlook.
- Historical Performance: What has 1272’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.
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