Bao Shen Holdings Limited (HKG:8151) is a small-cap stock with a market capitalization of HK$82m. 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? Consumer Durables businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes crucial. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into 8151 here.
Does 8151 produce enough cash relative to debt?
Over the past year, 8151 has reduced its debt from CN¥34m to CN¥24m , which is made up of current and long term debt. With this reduction in debt, 8151’s cash and short-term investments stands at CN¥47m for investing into the business. Moreover, 8151 has generated cash from operations of CN¥6m during the same period of time, leading to an operating cash to total debt ratio of 24%, meaning that 8151’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 8151’s case, it is able to generate 0.24x cash from its debt capital.
Does 8151’s liquid assets cover its short-term commitments?
At the current liabilities level of CN¥51m liabilities, the company has been able to meet these obligations given the level of current assets of CN¥98m, with a current ratio of 1.92x. For Consumer Durables companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is 8151’s debt level acceptable?
8151’s level of debt is appropriate relative to its total equity, at 30%. This range is considered safe as 8151 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if 8151’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 8151, the ratio of 6.81x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
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8151’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure 8151 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Bao Shen Holdings to get a more holistic view of the stock by looking at: