Investors are always looking for growth in small-cap stocks like Yulong Eco-Materials Limited (NASDAQ:YECO), with a market cap of US$8.13M. However, an important fact which most ignore is: how financially healthy is the business? Since YECO is loss-making right now, it’s essential to evaluate the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. However, 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?
YECO’s debt level has been constant at around US$11.85M over the previous year 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 , ready to deploy into the business. On top of this, YECO has produced cash from operations of US$1.55M in the last twelve months, leading to 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 a sign of operational efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires a positive net income. In YECO’s case, it is able to generate 0.13x cash from its debt capital.
Does YECO’s liquid assets cover its short-term commitments?
With current liabilities at US$29.56M, it seems that the business 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.
Can YECO service its debt comfortably?
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 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.
With a high level of debt on its balance sheet, YECO could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for YECO to increase its operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for YECO’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Yulong Eco-Materials to get a more holistic view of the stock by looking at:
- 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.
- 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.
- 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.