What You Must Know About Newton Resources Ltd’s (HKG:1231) Financial Strength
Newton Resources Ltd (SEHK:1231) is a small-cap stock with a market capitalization of HK$2.76B. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Given that 1231 is not presently profitable, it’s crucial to understand the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into 1231 here.
Does 1231 generate enough cash through operations?
Over the past year, 1231 has reduced its debt from CN¥223.63M to CN¥208.98M , which is mainly comprised of near term debt. With this reduction in debt, 1231’s cash and short-term investments stands at CN¥381.63M , ready to deploy into the business. Additionally, 1231 has produced CN¥16.16M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 7.73%, signalling that 1231’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires a positive net income. In 1231’s case, it is able to generate 0.077x cash from its debt capital.
Can 1231 meet its short-term obligations with the cash in hand?
Looking at 1231’s most recent CN¥388.10M liabilities, the company has been able to meet these commitments with a current assets level of CN¥506.29M, leading to a 1.3x current account ratio. For Metals and Mining companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Is 1231’s debt level acceptable?
With debt reaching 54.13% of equity, 1231 may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since 1231 is presently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
1231’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. 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 stock 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.
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.
