Investors are always looking for growth in small-cap stocks like China Technology Solar Power Holdings Limited (

HKG:8111

),is cedar ridge whitetails high fence with a market cap of HK$216m. However, an important fact which most ignore is: how financially healthy is the business? Tech companies, in particular ones that run negative earnings, are more likely to be higher risk. So, understanding the company’s financial health becomes essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I suggest you

dig deeper yourself into 8111 here

.

How much cash does 8111 generate through its operations?

8111’s debt levels have fallen from HK$61m to HK$50m over the last 12 months , which also accounts for long term debt. With this reduction in debt, 8111’s cash and short-term investments stands at HK$18m , ready to deploy into the business. On top of this, 8111 has generated cash from operations of HK$1.5m in the last twelve months, resulting in an operating cash to total debt ratio of 2.9%, signalling that 8111’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making companies since metrics such as return on asset (ROA) requires positive earnings. In 8111’s case, it is able to generate 0.029x cash from its debt capital.

Does 8111’s liquid assets cover its short-term commitments?

Looking at 8111’s HK$52m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.42x. Usually, for Tech companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

SEHK:8111 Historical Debt January 3rd 19

Does 8111 face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 69%, 8111 can be considered as an above-average 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 8111 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.

Next Steps:

Although 8111’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around 8111’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure 8111 has company-specific issues impacting its capital structure decisions. I suggest you continue to research China Technology Solar Power Holdings to get a more holistic view of the small-cap by looking at:

Story continues

Valuation

: What is 8111 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 8111 is currently mispriced by the market.

Historical Performance

: What has 8111’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 past 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. For errors that warrant correction please contact the editor at

[email protected]

.

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