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Investors are always looking for growth in small-cap stocks like China Golden Classic Group Limited (HKG:8281), with a market cap of HK$310m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into 8281 here.
How does 8281’s operating cash flow stack up against its debt?
8281’s debt levels have fallen from CN¥46m to CN¥39m over the last 12 months , which is mainly comprised of near term debt. With this debt payback, 8281 currently has CN¥12m remaining in cash and short-term investments , ready to deploy into the business. On top of this, 8281 has produced cash from operations of CN¥4m in the last twelve months, leading to an operating cash to total debt ratio of 8.9%, meaning that 8281’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 8281’s case, it is able to generate 0.089x cash from its debt capital.
Can 8281 pay its short-term liabilities?
At the current liabilities level of CN¥97m liabilities, it appears that the company has been able to meet these commitments with a current assets level of CN¥123m, leading to a 1.28x current account ratio. Usually, for Personal Products 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.
Does 8281 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 19%, 8281’s debt level may be seen as prudent. This range is considered safe as 8281 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if 8281’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 8281, the ratio of 6.01x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as 8281’s high interest coverage is seen as responsible and safe practice.
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8281’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how 8281 has been performing in the past. I suggest you continue to research China Golden Classic Group to get a better picture of the stock by looking at: