Investors are always looking for growth in small-cap stocks like China Recycling Energy Corporation (NASDAQ:CREG), with a market cap of US$10m. However, an important fact which most ignore is: how financially healthy is the business? Given that CREG is not presently profitable, it’s crucial 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. However, this commentary is still very high-level, so I suggest you dig deeper yourself into CREG here.

How does CREG’s operating cash flow stack up against its debt?

Over the past year, CREG has maintained its debt levels at around US$50m , which is mainly comprised of near term debt. At this stable level of debt, CREG’s cash and short-term investments stands at US$51m , ready to deploy into the business. Additionally, CREG has generated cash from operations of US$3m over the same time period, leading to an operating cash to total debt ratio of 5.3%, signalling that CREG’s debt is not appropriately covered by operating cash. 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 CREG’s case, it is able to generate 0.053x cash from its debt capital.

Can CREG meet its short-term obligations with the cash in hand?

With current liabilities at US$70m, it seems that the business has been able to meet these obligations given the level of current assets of US$95m, with a current ratio of 1.35x. Usually, for Commercial Services companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Is CREG’s debt level acceptable?

With a debt-to-equity ratio of 25%, CREG’s debt level may be seen as prudent. CREG is not taking on too much debt commitment, which may be constraining for future growth. Risk around debt is very low for CREG, and the company also has the ability and headroom to increase debt if needed going forward.

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CREG’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure CREG has company-specific issues impacting its capital structure decisions. You should continue to research China Recycling Energy to get a better picture of the stock by looking at: