What Does China Everbright Greentech Limited's (HKG:1257) Balance Sheet Tell Us About It?
China Everbright Greentech Limited (HKG:1257) is a small-cap stock with a market capitalization of HK$12b. 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? Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is not a comprehensive overview, so I suggest you dig deeper yourself into 1257 here.
Does 1257 Produce Much Cash Relative To Its Debt?
1257 has built up its total debt levels in the last twelve months, from HK$3.5b to HK$6.0b – this includes long-term debt. With this increase in debt, 1257's cash and short-term investments stands at HK$2.1b , ready to be used for running the business. We note it produced negative cash flow over the last twelve months. 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 1257’s operating efficiency ratios such as ROA here.
Does 1257’s liquid assets cover its short-term commitments?
With current liabilities at HK$3.4b, it appears that the company has been able to meet these commitments with a current assets level of HK$5.2b, leading to a 1.55x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Renewable Energy companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does 1257 face the risk of succumbing to its debt-load?
1257 is a relatively highly levered company with a debt-to-equity of 64%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 1257's case, the ratio of 10.46x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
1257’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how 1257 has been performing in the past. You should continue to research China Everbright Greentech to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for 1257’s future growth? Take a look at our free research report of analyst consensus for 1257’s outlook.
Historical Performance: What has 1257'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.
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