Investors are always looking for growth in small-cap stocks like ChinaNet Online Holdings Inc (NASDAQ:CNET), with a market cap of USD $15.18M. However, an important fact which most ignore is: how financially healthy is the company? The significance of doing due diligence on a company’s financial strength stems from the fact that over 20,000 companies go bankrupt in every quarter in the US alone. These factors make a basic understanding of a company’s financial position of utmost importance for a potential investor. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Check out our latest analysis for ChinaNet Online Holdings
Does CNET generate enough cash through operations?
Unxpected adverse events, such as natural disasters and wars, can be a true test of a company’s capacity to meet its obligations. These adverse events bring devastation and yet does not absolve the company from its debt. We can test the impact of these adverse events by looking at whether cash from its current operations can pay back its current debt obligations. CNET’s recent operating cash flow was -2.43 times its debt within the past year. This means what CNET can generate on an annual basis, which is currently a negative value, does not cover what it actually owes its debtors in the near term. This raises a red flag, looking at CNET’s operations at this point in time.
Can CNET pay its short-term liabilities?
What about its commitments to other stakeholders such as payments to suppliers and employees? During times of unfavourable events, CNET could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We test for CNET’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that CNET does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Is CNET’s level of debt at an acceptable level?
While ideally the debt-to equity ratio of a financially healthy company should be less than 40%, several factors such as industry life-cycle and economic conditions can result in a company raising a significant amount of debt. CNET’s debt-to-equity ratio stands at 4.08%, which indicates that the company faces low risk associated with debt.
Are you a shareholder? CNET’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that its financial position may change. I recommend keeping on top of market expectations for CNET’s future growth on our free analysis platform.
Are you a potential investor? ChinaNet Online Holdings currently has financial flexibility to ramp up growth in the future. In addition, its high liquidity means the company should continue to operate smoothly in the case of adverse events. In order to build your confidence in the stock, you need to further analyse the company’s track record. You should continue your analysis by taking a look at CNET’s past performance analysis on our free platform to conclude on CNET’s financial health.
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.