While small-cap stocks, such as China CBM Group Company Limited (SEHK:8270) with its market cap of HK$92.36M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Oil and Gas companies, especially ones that are currently loss-making, tend to be high risk. Assessing first and foremost the financial health is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into 8270 here.
Does 8270 generate an acceptable amount of cash through operations?
8270’s debt levels have fallen from CN¥122.8M to CN¥94.0M over the last 12 months , which comprises of short- and long-term debt. With this debt payback, 8270 currently has CN¥20.7M remaining in cash and short-term investments for investing into the business. Additionally, 8270 has generated CN¥22.9M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 0.24x, indicating that 8270’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In 8270’s case, it is able to generate 0.24x cash from its debt capital.
Can 8270 meet its short-term obligations with the cash in hand?
Looking at 8270’s most recent CN¥458.2M liabilities, it seems that the business has not been able to meet these commitments with a current assets level of CN¥132.0M, leading to a 0.29x current account ratio. which is under the appropriate industry ratio of 3x.
Is 8270’s level of debt at an acceptable level?
With debt at 23.27% of equity, 8270 may be thought of as appropriately levered. 8270 is not taking on too much debt commitment, which may be constraining for future growth. Investors’ risk associated with debt is very low with 8270, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
Are you a shareholder? 8270’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Given that 8270’s financial situation may change. I recommend keeping on top of market expectations for 8270’s future growth on our free analysis platform.