While small-cap stocks, such as Yulong Eco-Materials Limited (NASDAQ:YECO) with its market cap of US$6.12M, 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 YECO is loss-making right now, it’s essential 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. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into YECO here.
Does YECO generate an acceptable amount of cash through operations?
Over the past year, YECO has maintained its debt levels at around US$11.85M made up of predominantly near term debt. At this current level of debt, YECO’s cash and short-term investments stands at US$1.81M for investing into the business. Moreover, YECO has produced cash from operations of US$1.55M over the same time period, resulting in an operating cash to total debt ratio of 13.08%, signalling that YECO’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies since metrics such as return on asset (ROA) requires positive earnings. In YECO’s case, it is able to generate 0.13x cash from its debt capital.
Can YECO pay its short-term liabilities?
At the current liabilities level of US$29.56M liabilities, the company has not been able to meet these commitments with a current assets level of US$8.91M, leading to a 0.3x current account ratio. which is under the appropriate industry ratio of 3x.
Does YECO face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, YECO is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since YECO is currently 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.
YECO’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. 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 YECO has been performing in the past. I suggest you continue to research Yulong Eco-Materials to get a better picture of the stock by looking at:
- 1. Valuation: What is YECO 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 YECO is currently mispriced by the market.
- 2. Historical Performance: What has YECO’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.