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Beijing Enterprises Environment Group Limited (HKG:154) is a small-cap stock with a market capitalization of HK$1.14b. 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 essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I suggest you dig deeper yourself into 154 here.
Does 154 produce enough cash relative to debt?
Over the past year, 154 has reduced its debt from HK$3.67b to HK$3.02b , which comprises of short- and long-term debt. With this debt payback, 154 currently has HK$2.06b remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, 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 examine some of 154’s operating efficiency ratios such as ROA here.
Can 154 pay its short-term liabilities?
With current liabilities at HK$3.33b, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.8x, which is below the prudent industry ratio of 3x.
Does 154 face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, 154 is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether 154 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 154’s, case, the ratio of 8.05x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 154 ample headroom to grow its debt facilities.
Next Steps:
154’s high debt level indicates room for improvement. Furthermore, its cash flow coverage of less than a quarter of debt means that operating efficiency could also be an issue. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure 154 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Beijing Enterprises Environment Group to get a better picture of the stock by looking at: