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You Might Like China NT Pharma Group Company Limited (HKG:1011) But Do You Like Its Debt?

Investors are always looking for growth in small-cap stocks like China NT Pharma Group Company Limited (HKG:1011), with a market cap of HK$1.2b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, since poor capital management may bring about 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 recommend you dig deeper yourself into 1011 here.

Does 1011 Produce Much Cash Relative To Its Debt?

Over the past year, 1011 has reduced its debt from CN¥918m to CN¥705m , which also accounts for long term debt. With this debt payback, 1011’s cash and short-term investments stands at CN¥369m to keep the business going. On top of this, 1011 has generated CN¥153m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 22%, meaning that 1011’s operating cash is sufficient to cover its debt.

Can 1011 pay its short-term liabilities?

With current liabilities at CN¥1.1b, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.97x. The current ratio is the number you get when you divide current assets by current liabilities.

SEHK:1011 Historical Debt, March 19th 2019
SEHK:1011 Historical Debt, March 19th 2019

Does 1011 face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 46%, 1011 can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can test if 1011’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 1011, the ratio of 6.62x suggests that interest is appropriately covered, which means that lenders may be willing to lend out more funding as 1011’s high interest coverage is seen as responsible and safe practice.

Next Steps:

1011’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. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for 1011’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research China NT Pharma Group to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for 1011’s future growth? Take a look at our free research report of analyst consensus for 1011’s outlook.

  2. Historical Performance: What has 1011’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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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.

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