Beautiful China Holdings Company Limited (HKG:706) is a small-cap stock with a market capitalization of HK$269m. 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? Given that 706 is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into 706 here.
Does 706 produce enough cash relative to debt?
Over the past year, 706 has maintained its debt levels at around HK$121m including long-term debt. At this current level of debt, 706’s cash and short-term investments stands at HK$254m for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of 706’s operating efficiency ratios such as ROA here.
Can 706 meet its short-term obligations with the cash in hand?
With current liabilities at HK$26m, the company has been able to meet these commitments with a current assets level of HK$308m, leading to a 12.01x current account ratio. However, a ratio above 3x may be considered excessive by some investors.
Does 706 face the risk of succumbing to its debt-load?
706’s level of debt is appropriate relative to its total equity, at 19%. This range is considered safe as 706 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 706, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
706 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for 706’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Beautiful China Holdings to get a more holistic view of the stock by looking at: