Investors are always looking for growth in small-cap stocks like Fuwei Films (Holdings) Co Ltd (NASDAQ:FFHL), with a market cap of USD ¥8.20M. 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 Fuwei Films (Holdings)
Does FFHL generate an acceptable amount of 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 catastrophes does not mean the company can stop servicing its debt obligations. 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. Last year, FFHL’s operating cash flow was -0.09x its current debt. This means what FFHL 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 FFHL’s operations at this point in time.
Can FFHL meet its short-term obligations with the cash in hand?
In addition to debtholders, a company must be able to pay its bills and salaries to keep the business running. During times of unfavourable events, FFHL could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We should examine if the company’s cash and short-term investment levels match its current liabilities. Our analysis shows that FFHL does not have enough liquid assets on hand to meet its upcoming liabilities. Though this is a common practice, since cash is better utilized invested in the business or returned to shareholders, it does raise some concerns for investors should adverse events arise.
Is FFHL’s level of debt at an acceptable level?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. In the case of FFHL, the debt-to-equity ratio is 82.17%, which means, while the company’s debt could pose a problem for its earnings stability, it is not at an alarmingly high level yet.
Are you a shareholder? FFHL’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. In the future, its financial position may be different. I suggest keeping on top of market expectations for FFHL’s future growth on our free analysis platform.
Are you a potential investor? FFHL’s high debt levels along with low cash coverage of debt as well as low liquidity coverage of short-term obligations may not build the strongest investment case. Though, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of FFHL’s track record. You should continue your analysis by taking a look at FFHL’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
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.