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China Sandi Holdings Limited (SEHK:910) is a small-cap stock with a market capitalization of HK$1.98B. 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? So, understanding the company’s financial health becomes vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into 910 here.
Does 910 generate an acceptable amount of cash through operations?
910 has built up its total debt levels in the last twelve months, from HK$742.99M to HK$805.10M – this includes both the current and long-term debt. With this rise in debt, 910’s cash and short-term investments stands at HK$332.14M for investing into the business. On top of this, 910 has produced HK$31.77M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 3.95%, meaning that 910’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 910’s case, it is able to generate 0.039x cash from its debt capital.
Does 910’s liquid assets cover its short-term commitments?
Looking at 910’s most recent HK$124.07M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 5.23x. However, a ratio greater than 3x may be considered as too high, as 910 could be holding too much capital in a low-return investment environment.
Can 910 service its debt comfortably?
With a debt-to-equity ratio of 36.38%, 910’s debt level may be seen as prudent. This range is considered safe as 910 is not taking on too much debt obligation, which may be constraining for future growth. We can test if 910’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 910, the ratio of 7.41x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 910 ample headroom to grow its debt facilities.
Next Steps:
Although 910’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, 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 910 has company-specific issues impacting its capital structure decisions. You should continue to research China Sandi Holdings to get a better picture of the stock by looking at: