Investors are always looking for growth in small-cap stocks like SORL Auto Parts Inc (NASDAQ:SORL), with a market cap of USD $93.82M. However, an important fact which most ignore is: how financially healthy is the company? There are always disruptions which destabilize an existing industry, in which most small-cap companies are the first casualties. Here are few basic financial health checks to judge whether a company fits the bill or there is an additional risk which you should consider before taking the plunge. See our latest analysis for SORL
Does SORL generate enough cash through operations?
There are many headwinds that come unannounced, such as natural disasters and political turmoil, which can challenge a small business and its ability to adapt and recover. Furthermore, failure to service debt can hurt its reputation, making funding expensive in the future. Can SORL pay off what it owes to its debtholder by using only cash from its operational activities? Last year, SORL’s operating cash flow was 0.06x its current debt. This is concerning as its incoming cash can pay off less than a tenth of what the company must return in the near term.
Can SORL meet its short-term obligations with the cash in hand?
What about its commitments to other stakeholders such as payments to suppliers and employees? During times of unfavourable events, SORL could be required to liquidate some of its assets to meet these upcoming payments, as cash flow from operations is hindered. We test for SORL’s ability to meet these needs by comparing its cash and short-term investments with current liabilities. Our analysis shows that SORL does have enough liquid assets on hand to meet its upcoming liabilities, which lowers our concerns should adverse events arise.
Is SORL’s level of debt at an acceptable level?
A substantially higher debt poses a significant threat to a company’s profitability during a downturn. For SORL, the debt-to-equity ratio is 38.88%, which means its debt level does not pose a threat to its operations right now. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings at least three times its interest payments is considered financially sound. In SORL’s case, its interest is excessively covered by its earnings as the ratio sits at 21.12x. Lenders may be less hesitant to lend out more funding as SORL’s high interest coverage is seen as responsible and safe practice.
Are you a shareholder? Although SORL’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that its financial position may change. I recommend researching market expectations for SORL’s future growth on our free analysis platform.
Are you a potential investor? SORL Auto Parts currently has financial flexibility to ramp up growth in the future. In addition, its high liquidity means the company should continue to operate smoothly in the case of adverse events. In order to build your conviction in the stock, you need to also examine the company’s track record. As a following step, you should take a look at SORL’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
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.