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While small-cap stocks, such as China Yuanbang Property Holdings Limited (SGX:BCD) with its market cap of S$12m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since BCD is loss-making right now, it’s crucial to evaluate the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into BCD here.
Does BCD produce enough cash relative to debt?
BCD has shrunken its total debt levels in the last twelve months, from CN¥1.2b to CN¥759m , which is made up of current and long term debt. With this reduction in debt, BCD’s cash and short-term investments stands at CN¥180m for investing into the business. Moreover, BCD has generated CN¥196m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 26%, signalling that BCD’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires a positive net income. In BCD’s case, it is able to generate 0.26x cash from its debt capital.
Can BCD meet its short-term obligations with the cash in hand?
At the current liabilities level of CN¥3.4b liabilities, it seems that the business has been able to meet these commitments with a current assets level of CN¥4.1b, leading to a 1.21x current account ratio. Usually, for Real Estate companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is BCD’s debt level acceptable?
BCD is a relatively highly levered company with a debt-to-equity of 83%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since BCD is currently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Although BCD’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure BCD has company-specific issues impacting its capital structure decisions. I recommend you continue to research China Yuanbang Property Holdings to get a more holistic view of the small-cap by looking at: