China Renewable Energy Investment Limited (HKG:987) is a small-cap stock with a market capitalization of HK$526m. 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? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into 987 here.
Does 987 produce enough cash relative to debt?
987 has shrunken its total debt levels in the last twelve months, from HK$691m to HK$649m , which also accounts for long term debt. With this debt repayment, the current cash and short-term investment levels stands at HK$251m , ready to deploy into the business. Moreover, 987 has generated cash from operations of HK$117m during the same period of time, leading to an operating cash to total debt ratio of 18%, indicating that 987’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 987’s case, it is able to generate 0.18x cash from its debt capital.
Does 987’s liquid assets cover its short-term commitments?
At the current liabilities level of HK$337m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.42x. Generally, for Renewable Energy 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.
Can 987 service its debt comfortably?
987’s level of debt is appropriate relative to its total equity, at 36%. This range is considered safe as 987 is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether 987 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 987’s, case, the ratio of 1.3x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as 987’s low interest coverage already puts the company at higher risk of default.
Next Steps:
987’s high cash coverage and appropriate 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. I admit this is a fairly basic analysis for 987’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research China Renewable Energy Investment to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 987’s future growth? Take a look at our free research report of analyst consensus for 987’s outlook.
- Historical Performance: What has 987’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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.