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Ajisen (China) Holdings Limited (HKG:538) is a small-cap stock with a market capitalization of HK$3.4b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Since 538 is loss-making right now, it’s vital to understand the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into 538 here.
How does 538’s operating cash flow stack up against its debt?
538 has built up its total debt levels in the last twelve months, from CN¥329m to CN¥369m , which comprises of short- and long-term debt. With this growth in debt, 538 currently has CN¥1.5b remaining in cash and short-term investments for investing into the business. Moreover, 538 has generated cash from operations of CN¥341m over the same time period, resulting in an operating cash to total debt ratio of 92%, signalling that 538’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires positive earnings. In 538’s case, it is able to generate 0.92x cash from its debt capital.
Can 538 meet its short-term obligations with the cash in hand?
With current liabilities at CN¥666m, it appears that the company has been able to meet these commitments with a current assets level of CN¥1.7b, leading to a 2.6x current account ratio. Usually, for Hospitality 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.
Is 538’s debt level acceptable?
With debt at 12% of equity, 538 may be thought of as appropriately levered. 538 is not taking on too much debt commitment, which may be constraining for future growth. Investors’ risk associated with debt is very low with 538, and the company has plenty of headroom and ability to raise debt should it need to in the future.
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538’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how 538 has been performing in the past. You should continue to research Ajisen (China) Holdings to get a better picture of the stock by looking at: