While small-cap stocks, such as Bolina Holding Co Ltd (SEHK:1190) with its market cap of HK$144.37M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since 1190 is loss-making right now, 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. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into 1190 here.
Does 1190 generate an acceptable amount of cash through operations?
1190 has shrunken its total debt levels in the last twelve months, from CN¥567.7M to CN¥430.2M , which is made up of current and long term debt. With this debt payback, the current cash and short-term investment levels stands at CN¥520.1M , 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 1190’s operating efficiency ratios such as ROA here.
Can 1190 meet its short-term obligations with the cash in hand?
At the current liabilities level of CN¥442.3M liabilities, it seems that the business has been able to meet these commitments with a current assets level of CN¥1,213.9M, leading to a 2.74x current account ratio. Usually, for Building companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is 1190’s debt level acceptable?
With debt reaching 62.87% of equity, 1190 may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since 1190 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:
At its current level of cash flow coverage, 1190 has room for improvement to better cushion for events which may require debt repayment. However, 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 1190’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Bolina Holding to get a better picture of the stock by looking at: