While small-cap stocks, such as Fuwei Films (Holdings) Co Ltd. (NASDAQ:FFHL) with its market cap of US$12.21M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since FFHL is loss-making right now, it’s vital to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into FFHL here.
Does FFHL generate enough cash through operations?
FFHL’s debt level has been constant at around CN¥201.07M over the previous year – this includes both the current and long-term debt. At this stable level of debt, FFHL’s cash and short-term investments stands at CN¥12.96M for investing into the business. Additionally, FFHL has generated CN¥10.83M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 5.38%, meaning that FFHL’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making businesses since metrics such as return on asset (ROA) requires positive earnings. In FFHL’s case, it is able to generate 0.054x cash from its debt capital.
Can FFHL pay its short-term liabilities?
Looking at FFHL’s most recent CN¥293.69M liabilities, it appears that the company has not been able to meet these commitments with a current assets level of CN¥120.76M, leading to a 0.41x current account ratio. which is under the appropriate industry ratio of 3x.
Does FFHL face the risk of succumbing to its debt-load?
FFHL is a relatively highly levered company with a debt-to-equity of 90.97%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since FFHL is presently 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.
With a high level of debt on its balance sheet, FFHL could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for FFHL to increase its operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how FFHL has been performing in the past. You should continue to research Fuwei Films (Holdings) to get a better picture of the stock by looking at:
- Valuation: What is FFHL 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 FFHL is currently mispriced by the market.
- Historical Performance: What has FFHL’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.