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Beijing Sports and Entertainment Industry Group Limited (SEHK:1803) is a small-cap stock with a market capitalization of HK$3.85B. 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? Given that 1803 is not presently profitable, it’s essential 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, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into 1803 here.
Does 1803 generate enough cash through operations?
Over the past year, 1803 has ramped up its debt from HK$45.32M to HK$175.16M , which is mainly comprised of near term debt. With this growth in debt, 1803’s cash and short-term investments stands at HK$311.31M for investing 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 assess some of 1803’s operating efficiency ratios such as ROA here.
Does 1803’s liquid assets cover its short-term commitments?
At the current liabilities level of HK$212.81M 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 1.58x. Usually, for Logistics companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Does 1803 face the risk of succumbing to its debt-load?
1803 is a relatively highly levered company with a debt-to-equity of 81.82%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since 1803 is currently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
1803’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, 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 1803 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Beijing Sports and Entertainment Industry Group to get a better picture of the stock by looking at: