While small-cap stocks, such as Northeast Electric Development Company Limited (SEHK:42) with its market cap of HK$4.25B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since 42 is loss-making right now, it’s vital to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into 42 here.
Does 42 generate an acceptable amount of cash through operations?
42 has built up its total debt levels in the last twelve months, from CN¥9.0M to CN¥29.0M . With this increase in debt, 42 currently has CN¥27.6M remaining in cash and short-term investments , ready to deploy into the business. Though 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 take a look at some of 42’s operating efficiency ratios such as ROA here.
Can 42 pay its short-term liabilities?
At the current liabilities level of CN¥122.6M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of CN¥255.3M, with a current ratio of 2.08x. For electrical companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does 42 face the risk of succumbing to its debt-load?
42’s level of debt is low relative to its total equity, at 3.87%. This range is considered safe as 42 is not taking on too much debt obligation, which may be constraining for future growth. 42’s risk around capital structure is almost non-existent, and the company has the headroom and ability to raise debt should it need to in the future.
Next Steps:
Are you a shareholder? 42 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Going forward, its financial position may be different. I recommend keeping on top of market expectations for 42’s future growth on our free analysis platform.
Are you a potential investor? 42’s relatively safe debt levels is even more impressive due to its ability to generate high cash flow, which illustrates operating efficiency. Moreover, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. In order to build your confidence in the stock, you need to also analyse 42’s track record. You should continue your analysis by taking a look at 42’s past performance analysis on our free platform to conclude on 42’s financial health.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.