Investors are always looking for growth in small-cap stocks like Concord Medical Services Holdings Limited (NYSE:CCM), with a market cap of US$109m. However, an important fact which most ignore is: how financially healthy is the business? Given that CCM is not presently profitable, it’s vital to understand the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, potential investors would need to take a closer look, and I suggest you dig deeper yourself into CCM here.
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Does CCM Produce Much Cash Relative To Its Debt?
Over the past year, CCM has reduced its debt from CN¥1.6b to CN¥1.2b – this includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at CN¥455m to keep the business going. Moving on, operating cash flow was negative over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of CCM’s operating efficiency ratios such as ROA here.
Can CCM pay its short-term liabilities?
At the current liabilities level of CN¥870m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.41x. The current ratio is the number you get when you divide current assets by current liabilities. For Healthcare companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.
Is CCM’s debt level acceptable?
With debt reaching 43% of equity, CCM may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. However, since CCM is currently 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.
CCM’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. Since there is also no concerns around CCM's liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I'm sure CCM has company-specific issues impacting its capital structure decisions. You should continue to research Concord Medical Services Holdings to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for CCM’s future growth? Take a look at our free research report of analyst consensus for CCM’s outlook.
- Historical Performance: What has CCM'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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