How Financially Strong Is Tibet Water Resources Ltd. (HKG:1115)?
While small-cap stocks, such as Tibet Water Resources Ltd. (HKG:1115) with its market cap of HK$5.9b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, these checks don’t give you a full picture, so I’d encourage you to dig deeper yourself into 1115 here.
Does 1115 Produce Much Cash Relative To Its Debt?
1115’s debt level has been constant at around CN¥894m over the previous year including long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at CN¥936m to keep the business going. On top of this, 1115 has produced CN¥349m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 39%, meaning that 1115’s debt is appropriately covered by operating cash.
Can 1115 pay its short-term liabilities?
With current liabilities at CN¥883m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.02x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Beverage companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does 1115 face the risk of succumbing to its debt-load?
1115’s level of debt is appropriate relative to its total equity, at 27%. This range is considered safe as 1115 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether 1115 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 1115’s, case, the ratio of 26.38x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
1115 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure 1115 has company-specific issues impacting its capital structure decisions. You should continue to research Tibet Water Resources to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for 1115’s future growth? Take a look at our free research report of analyst consensus for 1115’s outlook.
Valuation: What is 1115 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 1115 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.
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