While small-cap stocks, such as SORL Auto Parts Inc (NASDAQ:SORL) with its market cap of US$119.11M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into SORL here.
Does SORL generate an acceptable amount of cash through operations?
SORL has sustained its debt level by about US$27.42M over the last 12 months made up of predominantly near term debt. At this stable level of debt, SORL currently has US$8.06M remaining in cash and short-term investments , ready to deploy into the business. Moreover, SORL has produced US$5.43M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 19.80%, indicating that SORL’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In SORL’s case, it is able to generate 0.2x cash from its debt capital.
Can SORL pay its short-term liabilities?
Looking at SORL’s most recent US$138.94M liabilities, the company has been able to meet these obligations given the level of current assets of US$239.27M, with a current ratio of 1.72x. Usually, for Auto Components companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Can SORL service its debt comfortably?
SORL is a relatively highly levered company with a debt-to-equity of 42.18%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether SORL is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In SORL’s, case, the ratio of 18.91x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving SORL ample headroom to grow its debt facilities.
SORL’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. This is only a rough assessment of financial health, and I’m sure SORL has company-specific issues impacting its capital structure decisions. I suggest you continue to research SORL Auto Parts to get a more holistic view of the stock by looking at:
- 1. Future Outlook: What are well-informed industry analysts predicting for SORL’s future growth? Take a look at our free research report of analyst consensus for SORL’s outlook.
- 2. Historical Performance: What has SORL’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.
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.