Are China Education Resources Inc.'s (CVE:CHN) Interest Costs Too High?
Want to participate in a research study? Help shape the future of investing tools and earn a $60 gift card!
China Education Resources Inc. (CVE:CHN) is a small-cap stock with a market capitalization of CA$2.4m. 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. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is not a comprehensive overview, so I recommend you dig deeper yourself into CHN here.
CHN’s Debt (And Cash Flows)
CHN has built up its total debt levels in the last twelve months, from US$1.4m to US$1.9m made up of predominantly near term debt. With this rise in debt, the current cash and short-term investment levels stands at US$2.5m to keep the business going. On top of this, CHN has generated cash from operations of US$973k in the last twelve months, leading to an operating cash to total debt ratio of 51%, signalling that CHN’s current level of operating cash is high enough to cover debt.
Can CHN pay its short-term liabilities?
Looking at CHN’s US$9.0m in current liabilities, the company has been able to meet these obligations given the level of current assets of US$10m, with a current ratio of 1.15x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Consumer Services companies, this is a reasonable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does CHN face the risk of succumbing to its debt-load?
CHN is a highly-leveraged company with debt exceeding equity by over 100%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether CHN is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In CHN's, case, the ratio of 1.23x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as CHN’s low interest coverage already puts the company at higher risk of default.
Next Steps:
Although CHN’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I'm sure CHN has company-specific issues impacting its capital structure decisions. I recommend you continue to research China Education Resources to get a better picture of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for CHN’s future growth? Take a look at our free research report of analyst consensus for CHN’s outlook.
Valuation: What is CHN worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CHN is currently mispriced by the market.
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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
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.
