Investors are always looking for growth in small-cap stocks like SORL Auto Parts, Inc. (NASDAQ:SORL), with a market cap of US$47m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into SORL here.
Does SORL produce enough cash relative to debt?
SORL’s debt levels surged from US$82m to US$185m over the last 12 months , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at US$18m , ready to deploy into the business. Moreover, SORL has produced cash from operations of US$100m during the same period of time, leading to an operating cash to total debt ratio of 54%, signalling that SORL’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SORL’s case, it is able to generate 0.54x cash from its debt capital.
Does SORL’s liquid assets cover its short-term commitments?
With current liabilities at US$471m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.18x. Generally, for Auto Components companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is SORL’s debt level acceptable?
SORL is a relatively highly levered company with a debt-to-equity of 92%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether SORL 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 SORL’s, case, the ratio of 4.19x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as SORL’s high interest coverage is seen as responsible and safe practice.
SORL’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around SORL’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for SORL’s financial health. Other important fundamentals need to be considered alongside. You should continue to research SORL Auto Parts to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SORL’s future growth? Take a look at our free research report of analyst consensus for SORL’s outlook.
- Historical Performance: What has SORL’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.
To help readers see past 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.
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