Does China Pharma Holdings Inc’s (CPHI) Debt Level Pose A Serious Problem?
Investors are always looking for growth in small-cap stocks like China Pharma Holdings Inc (AMEX:CPHI), with a market cap of USD $6.75M. However, an important fact which most ignore is: how financially healthy is the company? There are always disruptions which destabilize an existing industry, in which most small-cap companies are the first casualties. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge. Check out our latest analysis for China Pharma Holdings
Does CPHI generate an acceptable amount of cash through operations?
There are many headwinds that come unannounced, such as natural disasters and political turmoil, which can challenge a small business and its ability to adapt and recover. These adverse events bring devastation and yet does not absolve the company from its debt. Can CPHI pay off what it owes to its debtholder by using only cash from its operational activities? CPHI’s recent operating cash flow was 0.11 times its debt within the past year. A ratio of over 0.1x shows that CPHI is generating adequate cash from its core business, which should increase its potential to pay back near-term debt.
Can CPHI meet its short-term obligations with the cash in hand?
What about its other commitments such as payments to suppliers and salaries to its employees? In times of adverse events, CPHI may need to liquidate its short-term assets to pay these immediate obligations. We test for CPHI’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that CPHI is unable to meet all of its upcoming commitments with its cash and other short-term assets. While this is not abnormal for companies, as their cash is better invested in the business or returned to investors than lying around, it does bring about some concerns should any unfavourable circumstances arise.
Does CPHI face the risk of succumbing to its debt-load?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. CPHI’s debt-to-equity ratio stands at 24.68%, which indicates that its debt is at an acceptable level.
Next Steps:
Are you a shareholder? Although CPHI’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Given that its financial position may be different. I suggest keeping on top of market expectations for CPHI’s future growth on our free analysis platform.
Are you a potential investor? CPHI appears to have a sensible level of debt, which means there’s still some headroom to grow debt funding. But its current cash flow coverage of existing debt, in addition to the low liquidity, is concerning. Though, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of CPHI’s track record. I encourage you to continue your research by taking a look at CPHI’s past performance analysis on our free platform to figure out CPHI’s financial health position.
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.
