Investors are always looking for growth in small-cap stocks like Cathay International Holdings Limited (LON:CTI), with a market cap of UK£29m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Pharmaceuticals industry, especially ones that are currently loss-making, tend to be high risk. Evaluating financial health as part of your investment thesis is essential. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into CTI here.
How does CTI’s operating cash flow stack up against its debt?
CTI’s debt level has been constant at around US$193m over the previous year – this includes long-term debt. At this stable level of debt, CTI’s cash and short-term investments stands at US$24m , ready to deploy into the business. Moving onto cash from operations, 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. For this article’s sake, I won’t be looking at this today, but you can take a look at some of CTI’s operating efficiency ratios such as ROA here.
Does CTI’s liquid assets cover its short-term commitments?
Looking at CTI’s US$193m in current liabilities, it seems that the business may not be able to easily meet these obligations given the level of current assets of US$136m, with a current ratio of 0.7x.
Does CTI face the risk of succumbing to its debt-load?
With total debt exceeding equities, CTI is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since CTI is currently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
CTI’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 CTI has been performing in the past. I suggest you continue to research Cathay International Holdings to get a more holistic view of the stock by looking at:
- Historical Performance: What has CTI’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.
To help readers see past 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. For errors that warrant correction please contact the editor at email@example.com.