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Bortex Global Limited (SEHK:8118) is a small-cap stock with a market capitalization of HK$132.50M. 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? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into 8118 here.
Does 8118 generate an acceptable amount of cash through operations?
8118 has built up its total debt levels in the last twelve months, from HK$25.18M to HK$26.58M made up of predominantly near term debt. With this rise in debt, 8118 currently has HK$8.50M remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of 8118’s operating efficiency ratios such as ROA here.
Can 8118 pay its short-term liabilities?
With current liabilities at HK$56.09M, the company has been able to meet these obligations given the level of current assets of HK$80.03M, with a current ratio of 1.43x. For Electrical 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 8118 service its debt comfortably?
8118 is a relatively highly levered company with a debt-to-equity of 41.79%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if 8118’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 8118, the ratio of 21.81x suggests that interest is comfortably 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.
Next Steps:
8118’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. 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 8118 has company-specific issues impacting its capital structure decisions. You should continue to research Bortex Global to get a better picture of the stock by looking at: