While small-cap stocks, such as Asia Investment Finance Group Limited (SEHK:33) with its market cap of HK$895.41M, 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 33 is loss-making right now, it’s essential to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I suggest you dig deeper yourself into 33 here.
Does 33 generate enough cash through operations?
33 has built up its total debt levels in the last twelve months, from HK$92.64M to HK$99.12M , which is mainly comprised of near term debt. With this rise in debt, 33 currently has HK$112.85M remaining in cash and short-term investments , ready to deploy into the business. Moreover, 33 has produced cash from operations of HK$33.95M in the last twelve months, leading to an operating cash to total debt ratio of 34.25%, signalling that 33’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires a positive net income. In 33’s case, it is able to generate 0.34x cash from its debt capital.
Does 33’s liquid assets cover its short-term commitments?
Looking at 33’s most recent HK$167.84M liabilities, it appears that the company has been able to meet these commitments with a current assets level of HK$409.18M, leading to a 2.44x current account ratio. Usually, for Retail Distributors companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is 33’s debt level acceptable?
33’s level of debt is appropriate relative to its total equity, at 27.71%. This range is considered safe as 33 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is very low with 33, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
33 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how 33 has been performing in the past. You should continue to research Asia Investment Finance Group to get a more holistic view of the stock by looking at: