How Financially Strong Is China Everbright Greentech Limited (HKG:1257)?
China Everbright Greentech Limited (HKG:1257) is a small-cap stock with a market capitalization of HK$13.1b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into 1257 here.
Does 1257 produce enough cash relative to debt?
Over the past year, 1257 has ramped up its debt from HK$2.7b to HK$4.4b , which comprises of short- and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at HK$2.2b , ready to deploy 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. For this article’s sake, I won’t be looking at this today, but you can examine some of 1257’s operating efficiency ratios such as ROA here.
Does 1257’s liquid assets cover its short-term commitments?
With current liabilities at HK$2.8b, it appears that the company has been able to meet these commitments with a current assets level of HK$4.8b, leading to a 1.73x current account ratio. Generally, for Renewable Energy 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.
Does 1257 face the risk of succumbing to its debt-load?
1257 is a relatively highly levered company with a debt-to-equity of 47%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether 1257 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 1257’s, case, the ratio of 11.29x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving 1257 ample headroom to grow its debt facilities.
Next Steps:
At its current level of cash flow coverage, 1257 has room for improvement to better cushion for events which may require debt repayment. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure 1257 has company-specific issues impacting its capital structure decisions. I recommend you continue to research China Everbright Greentech to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for 1257’s future growth? Take a look at our free research report of analyst consensus for 1257’s outlook.
Valuation: What is 1257 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 1257 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 editorial-team@simplywallst.com.
