Investors are always looking for growth in small-cap stocks like Eternity Technology Holdings Limited (HKG:1725), with a market cap of HK$399m. However, an important fact which most ignore is: how financially healthy is the business? Electronic companies, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. I believe these basic checks tell most of the story you need to know. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into 1725 here.
How much cash does 1725 generate through its operations?
1725’s debt level has been constant at around CN¥13m over the previous year , which is mainly comprised of near term debt. At this constant level of debt, 1725’s cash and short-term investments stands at CN¥32m for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of 1725’s operating efficiency ratios such as ROA here.
Can 1725 pay its short-term liabilities?
At the current liabilities level of CN¥225m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of CN¥307m, with a current ratio of 1.37x. Generally, for Electronic companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can 1725 service its debt comfortably?
With a debt-to-equity ratio of 12%, 1725’s debt level may be seen as prudent. This range is considered safe as 1725 is not taking on too much debt obligation, which may be constraining for future growth. We can test if 1725’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 1725, the ratio of 79.84x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving 1725 ample headroom to grow its debt facilities.
1725’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 proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how 1725 has been performing in the past. You should continue to research Eternity Technology Holdings to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1725’s future growth? Take a look at our free research report of analyst consensus for 1725’s outlook.
- Valuation: What is 1725 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 1725 is currently mispriced by the market.
- 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.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at firstname.lastname@example.org.