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While small-cap stocks, such as Puxin Limited (NYSE:NEW) with its market cap of US$549m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that NEW is not presently profitable, it’s crucial to assess the current state of its operations and pathway to profitability. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. However, this is not a comprehensive overview, so I suggest you dig deeper yourself into NEW here.
Does NEW Produce Much Cash Relative To Its Debt?
NEW has shrunk its total debt levels in the last twelve months, from CN¥686m to CN¥548m , which also accounts for long term debt. With this debt repayment, the current cash and short-term investment levels stands at CN¥778m , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn’t be useful. For this article’s sake, I won’t be looking at this today, but you can examine some of NEW’s operating efficiency ratios such as ROA here.
Can NEW pay its short-term liabilities?
With current liabilities at CN¥1.9b, the company may not have an easy time meeting these commitments with a current assets level of CN¥916m, leading to a current ratio of 0.47x. The current ratio is calculated by dividing current assets by current liabilities.
Can NEW service its debt comfortably?
With total debt exceeding equity, NEW is considered a highly levered company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. But since NEW is currently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although NEW’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how NEW has been performing in the past. You should continue to research Puxin to get a more holistic view of the stock by looking at:
- Historical Performance: What has NEW’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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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.