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Investors are always looking for growth in small-cap stocks like Fuwei Films (Holdings) Co Ltd (NASDAQ:FFHL), with a market cap of US$6.8m. However, an important fact which most ignore is: how financially healthy is the business? Since FFHL is loss-making right now, it’s essential to evaluate the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into FFHL here.
How does FFHL’s operating cash flow stack up against its debt?
FFHL’s debt levels have fallen from CN¥198m to CN¥178m over the last 12 months . With this reduction in debt, FFHL’s cash and short-term investments stands at CN¥25m for investing into the business. Additionally, FFHL has produced CN¥31m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 17%, meaning that FFHL’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for loss making businesses since metrics such as return on asset (ROA) requires a positive net income. In FFHL’s case, it is able to generate 0.17x cash from its debt capital.
Can FFHL meet its short-term obligations with the cash in hand?
With current liabilities at CN¥278m, it appears that the company may not have an easy time meeting these commitments with a current assets level of CN¥107m, leading to a current ratio of 0.38x.
Can FFHL service its debt comfortably?
FFHL is a relatively highly levered company with a debt-to-equity of 88%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since FFHL is presently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
FFHL’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. But, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how FFHL has been performing in the past. I recommend you continue to research Fuwei Films (Holdings) to get a more holistic view of the stock by looking at:
Valuation: What is FFHL 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 FFHL is currently mispriced by the market.
Historical Performance: What has FFHL’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.
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 email@example.com.