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While small-cap stocks, such as Celestial Asia Securities Holdings Limited (HKG:1049) with its market cap of HK$121m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Specialty Retail businesses operating in the environment facing headwinds from current disruption, in particular ones that run negative earnings, are inclined towards being higher risk. So, understanding the company’s financial health becomes crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into 1049 here.
How does 1049’s operating cash flow stack up against its debt?
1049 has built up its total debt levels in the last twelve months, from HK$240m to HK$278m – this includes both the current and long-term debt. With this growth in debt, 1049’s cash and short-term investments stands at HK$269m for investing into the business. On top of this, 1049 has produced cash from operations of HK$779k during the same period of time, leading to an operating cash to total debt ratio of 0.3%, indicating that 1049’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In 1049’s case, it is able to generate 0.0028x cash from its debt capital.
Can 1049 meet its short-term obligations with the cash in hand?
Looking at 1049’s most recent HK$591m liabilities, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.84x.
Can 1049 service its debt comfortably?
With debt reaching 70% of equity, 1049 may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since 1049 is presently unprofitable, 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:
1049’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for 1049’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Celestial Asia Securities Holdings to get a better picture of the stock by looking at: