Investors are always looking for growth in small-cap stocks like Shineco Inc (NASDAQ:TYHT), with a market cap of US$41.83m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I recommend you dig deeper yourself into TYHT here.
How does TYHT’s operating cash flow stack up against its debt?
Over the past year, TYHT has maintained its debt levels at around US$2.66m made up of predominantly near term debt. At this constant level of debt, the current cash and short-term investment levels stands at US$23.31m for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. 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 TYHT’s operating efficiency ratios such as ROA here.
Does TYHT’s liquid assets cover its short-term commitments?
Looking at TYHT’s most recent US$5.03m liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 8.89x. However, anything above 3x is considered high and could mean that TYHT has too much idle capital in low-earning investments.
Does TYHT face the risk of succumbing to its debt-load?With debt at 3.15% of equity, TYHT may be thought of as having low leverage. TYHT is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if TYHT’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For TYHT, the ratio of 242x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as TYHT’s high interest coverage is seen as responsible and safe practice.
Although TYHT’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure TYHT has company-specific issues impacting its capital structure decisions. I recommend you continue to research Shineco to get a better picture of the stock by looking at:
- Historical Performance: What has TYHT’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.