While small-cap stocks, such as China Green Agriculture Inc (NYSE:CGA) with its market cap of US$51.66M, 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 crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into CGA here.
Does CGA generate an acceptable amount of cash through operations?
CGA’s debt levels surged from US$12.43M to US$17.17M over the last 12 months , which is made up of current and long term debt. With this increase in debt, CGA currently has US$123.05M remaining in cash and short-term investments , ready to deploy into the business. Moreover, CGA has produced US$16.30M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 94.97%, meaning that CGA’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In CGA’s case, it is able to generate 0.95x cash from its debt capital.
Does CGA’s liquid assets cover its short-term commitments?
With current liabilities at US$49.72M, the company has been able to meet these commitments with a current assets level of US$370.95M, leading to a 7.46x current account ratio. However, anything about 3x may be excessive, since CGA may be leaving too much capital in low-earning investments.
Can CGA service its debt comfortably?
With a debt-to-equity ratio of 3.95%, CGA’s debt level is relatively low. CGA is not taking on too much debt commitment, which may be constraining for future growth. We can test if CGA’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 CGA, the ratio of 114x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving CGA ample headroom to grow its debt facilities.
CGA’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, 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 CGA has company-specific issues impacting its capital structure decisions. You should continue to research China Green Agriculture to get a more holistic view of the stock by looking at:
- 1. Valuation: What is CGA 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 CGA is currently mispriced by the market.
- 2. Historical Performance: What has CGA’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.
- 3. 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 pass 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.