While small-cap stocks, such as China Techfaith Wireless Communication Technology Limited (NASDAQ:CNTF) with its market cap of US$21.17M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Tech industry, in particular ones that run negative earnings, are more likely to be higher risk. Assessing first and foremost the financial health is crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into CNTF here.
Does CNTF generate enough cash through operations?
CNTF has shrunken its total debt levels in the last twelve months, from US$20.42M to US$17.24M , which comprises of short- and long-term debt. With this reduction in debt, CNTF currently has US$735.00K remaining in cash and short-term investments , ready to deploy into the business. On top of this, CNTF has produced US$19.44M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 112.77%, meaning that CNTF’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In CNTF’s case, it is able to generate 1.13x cash from its debt capital.
Does CNTF’s liquid assets cover its short-term commitments?
With current liabilities at US$48.13M, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.64x. Generally, for Tech companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does CNTF face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 5.97%, CNTF’s debt level is relatively low. This range is considered safe as CNTF is not taking on too much debt obligation, which may be constraining for future growth. CNTF’s risk around capital structure is almost non-existent, and the company has the headroom and ability to raise debt should it need to in the future.
CNTF’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for CNTF’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research China Techfaith Wireless Communication Technology to get a more holistic view of the stock by looking at:
- Historical Performance: What has CNTF’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 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.