China Green Agriculture Inc (NYSE:CGA) is a small-cap stock with a market capitalization of US$49.35M. 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 essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into CGA here.
How does CGA’s operating cash flow stack up against its debt?
Over the past year, CGA has ramped up its debt from US$12.43M to US$17.17M , which comprises of short- and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at US$123.05M , ready to deploy into the business. Moreover, CGA has produced cash from operations of US$21.71M in the last twelve months, leading to an operating cash to total debt ratio of 126.50%, indicating that CGA’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CGA’s case, it is able to generate 1.26x cash from its debt capital.
Can CGA pay its short-term liabilities?
Looking at CGA’s most recent US$49.72M liabilities, the company has been able to meet these commitments with a current assets level of US$370.95M, leading to a 7.46x current account ratio. However, a ratio greater than 3x may be considered as too high, as CGA could be holding too much capital in a low-return investment environment.
Can CGA service its debt comfortably?CGA’s level of debt is low relative to its total equity, at 4.02%. CGA is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether CGA 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 CGA’s, case, the ratio of 156x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as CGA’s high interest coverage is seen as responsible and safe practice.
CGA’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for CGA’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research China Green Agriculture to get a more holistic view of the stock by looking at:
- Valuation: What is CGA 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 CGA is currently mispriced by the market.
- Historical Performance: What has CGA’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.