Investors are always looking for growth in small-cap stocks like China Saite Group Company Limited (HKG:153), with a market cap of HK$1.1b. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I recommend you dig deeper yourself into 153 here.
Does 153 produce enough cash relative to debt?
Over the past year, 153 has ramped up its debt from CN¥98m to CN¥386m , which is made up of current and long term debt. With this growth in debt, 153 currently has CN¥731m remaining in cash and short-term investments for investing 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 assess some of 153’s operating efficiency ratios such as ROA here.
Can 153 pay its short-term liabilities?
Looking at 153’s most recent CN¥438m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of CN¥2.9b, with a current ratio of 6.6x. Having said that, many consider anything above 3x to be quite high and could mean that 153 has too much idle capital in low-earning investments.
Is 153’s debt level acceptable?
With a debt-to-equity ratio of 14%, 153’s debt level may be seen as prudent. This range is considered safe as 153 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if 153’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 153, the ratio of 61x 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:
153’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for 153’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research China Saite Group to get a more holistic view of the stock by looking at: