While small-cap stocks, such as Atlinks Group Limited (SEHK:8043) with its market cap of HK$164.00M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Communications companies, in particular ones that run negative earnings, are inclined towards being higher risk. Assessing first and foremost the financial health is essential. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into 8043 here.
How does 8043’s operating cash flow stack up against its debt?
Over the past year, 8043 has ramped up its debt from €8.67M to €9.16M . With this growth in debt, 8043 currently has €4.81M remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of 8043’s operating efficiency ratios such as ROA here.
Can 8043 pay its short-term liabilities?
Looking at 8043’s most recent €18.97M liabilities, the company has been able to meet these commitments with a current assets level of €23.62M, leading to a 1.25x current account ratio. For Communications companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Can 8043 service its debt comfortably?
With total debt exceeding equities, 8043 is considered a highly levered 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 8043 is currently 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.
Next Steps:
8043’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for 8043’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Atlinks Group to get a better picture of the stock by looking at: