While small-cap stocks, such as AKM Industrial Company Limited (SEHK:1639) with its market cap of HK$2.83B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Electronic companies, even ones that are profitable, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is essential. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I recommend you dig deeper yourself into 1639 here.
How does 1639’s operating cash flow stack up against its debt?
Over the past year, 1639 has reduced its debt from HK$134.39M to HK$67.98M . With this debt payback, 1639 currently has HK$89.29M remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of 1639’s operating efficiency ratios such as ROA here.
Can 1639 meet its short-term obligations with the cash in hand?
At the current liabilities level of HK$494.87M liabilities, it seems that the business has been able to meet these commitments with a current assets level of HK$549.43M, leading to a 1.11x current account ratio. For Electronic companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does 1639 face the risk of succumbing to its debt-load?
1639’s level of debt is low relative to its total equity, at 9.21%. This range is considered safe as 1639 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether 1639 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 1639’s, case, the ratio of 47.94x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving 1639 ample headroom to grow its debt facilities.
Next Steps:
1639’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. I admit this is a fairly basic analysis for 1639’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research AKM Industrial to get a better picture of the stock by looking at: