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Investors are always looking for growth in small-cap stocks like Luzhou Xinglu Water (Group) Co., Ltd. (HKG:2281), with a market cap of HK$1.2b. 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. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into 2281 here.
Does 2281 Produce Much Cash Relative To Its Debt?
2281 has built up its total debt levels in the last twelve months, from CN¥603m to CN¥844m – this includes long-term debt. With this increase in debt, 2281 currently has CN¥548m remaining in cash and short-term investments , ready to be used for running the business. Additionally, 2281 has generated cash from operations of CN¥346m during the same period of time, leading to an operating cash to total debt ratio of 41%, meaning that 2281’s operating cash is sufficient to cover its debt.
Can 2281 pay its short-term liabilities?
At the current liabilities level of CN¥988m, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.8x. The current ratio is the number you get when you divide current assets by current liabilities.
Does 2281 face the risk of succumbing to its debt-load?
With debt reaching 43% of equity, 2281 may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies.
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2281’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. 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 2281 has been performing in the past. I suggest you continue to research Luzhou Xinglu Water (Group) to get a better picture of the stock by looking at:
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Future Outlook: What are well-informed industry analysts predicting for 2281’s future growth? Take a look at our free research report of analyst consensus for 2281’s outlook.
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Historical Performance: What has 2281'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.
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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 editorial-team@simplywallst.com. 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.