China City Infrastructure Group Limited (HKG:2349) is a small-cap stock with a market capitalization of HK$924.7m. 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 2349 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. However, I know these factors are very high-level, so I recommend you dig deeper yourself into 2349 here.
Does 2349 produce enough cash relative to debt?
2349 has shrunken its total debt levels in the last twelve months, from HK$1.84b to HK$1.43b , which comprises of short- and long-term debt. With this reduction in debt, 2349’s cash and short-term investments stands at HK$56.1m , ready to deploy into the business. On top of this, 2349 has generated cash from operations of HK$18.3m during the same period of time, resulting in an operating cash to total debt ratio of 1.3%, meaning that 2349’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for unprofitable companies since metrics such as return on asset (ROA) requires positive earnings. In 2349’s case, it is able to generate 0.013x cash from its debt capital.
Does 2349’s liquid assets cover its short-term commitments?
With current liabilities at HK$1.30b, it appears that the company has been able to meet these obligations given the level of current assets of HK$1.71b, with a current ratio of 1.31x. Usually, for Real Estate 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 2349’s debt level acceptable?
With a debt-to-equity ratio of 95.0%, 2349 can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since 2349 is presently unprofitable, 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:
At its current level of cash flow coverage, 2349 has room for improvement to better cushion for events which may require debt repayment. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure 2349 has company-specific issues impacting its capital structure decisions. I suggest you continue to research China City Infrastructure Group to get a better picture of the stock by looking at: