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Investors are always looking for growth in small-cap stocks like AUX International Holdings Limited (HKG:2080), with a market cap of HK$307m. However, an important fact which most ignore is: how financially healthy is the business? Since 2080 is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into 2080 here.
2080’s Debt (And Cash Flows)
2080's debt level has been constant at around HK$115m over the previous year which accounts for long term debt. At this constant level of debt, the current cash and short-term investment levels stands at HK$213m to keep the business going. We note it produced negative cash flow over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of 2080’s operating efficiency ratios such as ROA here.
Can 2080 meet its short-term obligations with the cash in hand?
Looking at 2080’s HK$130m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.04x. The current ratio is the number you get when you divide current assets by current liabilities. 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 2080’s debt level acceptable?
With debt reaching 84% of equity, 2080 may be thought of as relatively highly levered. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since 2080 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:
2080’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around 2080'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 2080 has company-specific issues impacting its capital structure decisions. I recommend you continue to research AUX International Holdings to get a better picture of the small-cap by looking at: