China Yurun Food Group Limited (SEHK:1068) is a small-cap stock with a market capitalization of HK$1.48B. 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? Since 1068 is loss-making right now, it’s essential to assess the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into 1068 here.

Does 1068 generate an acceptable amount of cash through operations?

1068 has shrunken its total debt levels in the last twelve months, from HK$7,458.0M to HK$6,912.0M , which comprises of short- and long-term debt. With this debt payback, the current cash and short-term investment levels stands at HK$465.5M for investing into the business. However, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, 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 take a look at some of 1068’s operating efficiency ratios such as ROA here.

Can 1068 pay its short-term liabilities?

With current liabilities at HK$9,316.3M liabilities, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.4x, which is below the prudent industry ratio of 3x.

Is 1068’s level of debt at an acceptable level?

With debt reaching 80.58% of equity, 1068 may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since 1068 is presently loss-making, there’s a question of sustainability of its current operations. 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:

Are you a shareholder? With a high level of debt on its balance sheet, 1068 could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for 1068 to increase its operational efficiency. In addition to this, the company may struggle to meet its near term liabilities should an adverse event occur. Moving forward, its financial position may change. I suggest researching market expectations for 1068’s future growth on our free analysis platform.

Are you a potential investor? 1068’s large debt ratio on top of low cash coverage of debt in addition to low liquidity coverage of short-term expenses may send potential investors running the other way. However, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of 1068’s track record. I encourage you to continue your research by taking a look at 1068’s past performance analysis on our free platform to figure out 1068’s financial health position.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.