China Smarter Energy Group Holdings Limited (HKG:1004): Time For A Financial Health Check
While small-cap stocks, such as China Smarter Energy Group Holdings Limited (HKG:1004) with its market cap of HK$3.6b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that 1004 is not presently profitable, 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 recommend you dig deeper yourself into 1004 here.
How does 1004’s operating cash flow stack up against its debt?
1004’s debt levels surged from HK$1.8b to HK$2.3b over the last 12 months , which accounts for long term debt. With this growth in debt, the current cash and short-term investment levels stands at HK$231m , ready to deploy into the business. On top of this, 1004 has generated cash from operations of HK$551m over the same time period, resulting in an operating cash to total debt ratio of 24%, signalling that 1004’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires a positive net income. In 1004’s case, it is able to generate 0.24x cash from its debt capital.
Does 1004’s liquid assets cover its short-term commitments?
With current liabilities at HK$855m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.12x. Usually, for Renewable Energy companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does 1004 face the risk of succumbing to its debt-load?
1004 is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since 1004 is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Although 1004’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. I admit this is a fairly basic analysis for 1004’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research China Smarter Energy Group Holdings to get a more holistic view of the small-cap by looking at:
Valuation: What is 1004 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 1004 is currently mispriced by the market.
Historical Performance: What has 1004’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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