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While small-cap stocks, such as Newton Resources Ltd (HKG:1231) with its market cap of HK$3.4b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that 1231 is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is not a comprehensive overview, so I suggest you dig deeper yourself into 1231 here.
Does 1231 Produce Much Cash Relative To Its Debt?
1231 has sustained its debt level by about CN¥219m over the last 12 months made up of predominantly near term debt. At this constant level of debt, 1231 currently has CN¥157m remaining in cash and short-term investments to keep the business going. Moving on, operating cash flow was negative over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can take a look at some of 1231’s operating efficiency ratios such as ROA here.
Can 1231 meet its short-term obligations with the cash in hand?
At the current liabilities level of CN¥330m, it seems that the business has been able to meet these obligations given the level of current assets of CN¥404m, with a current ratio of 1.22x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Metals and Mining companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is 1231’s debt level acceptable?
With debt reaching 78% of equity, 1231 may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. Though, since 1231 is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
1231’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for 1231's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Newton Resources to get a more holistic view of the small-cap by looking at:
- Historical Performance: What has 1231'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.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.