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While small-cap stocks, such as Canvest Environmental Protection Group Company Limited (HKG:1381) with its market cap of HK$8.8b, 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. The following basic checks can help you get a picture of the company’s balance sheet strength. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into 1381 here.
Does 1381 Produce Much Cash Relative To Its Debt?
Over the past year, 1381 has ramped up its debt from HK$3.2b to HK$4.1b – this includes long-term debt. With this growth in debt, 1381 currently has HK$1.4b remaining in cash and short-term investments to keep the business going. Its negative operating cash flow means calculating cash-to-debt wouldn’t be useful. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of 1381’s operating efficiency ratios such as ROA here.
Can 1381 pay its short-term liabilities?
With current liabilities at HK$1.3b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.51x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Renewable Energy companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is 1381’s debt level acceptable?
1381 is a relatively highly levered company with a debt-to-equity of 78%. 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 1381’s case, the ratio of 5.88x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 1381 ample headroom to grow its debt facilities.
1381’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. Since there is also no concerns around 1381’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure 1381 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Canvest Environmental Protection Group to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1381’s future growth? Take a look at our free research report of analyst consensus for 1381’s outlook.
- Valuation: What is 1381 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 1381 is currently mispriced by the market.
- 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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If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.