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While small-cap stocks, such as Puxin Limited (NYSE:NEW) with its market cap of US$549m, 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 NEW is loss-making right now, it’s essential to assess the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, this is just a partial view of the stock, and I suggest you dig deeper yourself into NEW here.
Does NEW Produce Much Cash Relative To Its Debt?
Over the past year, NEW has reduced its debt from CN¥686m to CN¥548m – this includes long-term debt. With this debt repayment, NEW's cash and short-term investments stands at CN¥778m , ready to be used for running the business. Its negative operating cash flow means calculating cash-to-debt wouldn't be useful. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of NEW’s operating efficiency ratios such as ROA here.
Does NEW’s liquid assets cover its short-term commitments?
With current liabilities at CN¥1.9b, it seems that the business may not be able to easily meet these obligations given the level of current assets of CN¥916m, with a current ratio of 0.47x. The current ratio is the number you get when you divide current assets by current liabilities.
Does NEW face the risk of succumbing to its debt-load?
NEW is a highly-leveraged company with debt exceeding equity by over 100%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. Though, since NEW is presently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
NEW’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. Keep in mind I haven't considered other factors such as how NEW has been performing in the past. I suggest you continue to research Puxin to get a more holistic view of the stock by looking at:
Historical Performance: What has NEW'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.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. 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.