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Investors are always looking for growth in small-cap stocks like China Fordoo Holdings Limited (HKG:2399), with a market cap of HK$3.8b. However, an important fact which most ignore is: how financially healthy is the business? Since 2399 is loss-making right now, it’s essential to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into 2399 here.
How much cash does 2399 generate through its operations?
Over the past year, 2399 has maintained its debt levels at around CN¥476m comprising of short- and long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at CN¥505m for investing into the business. Additionally, 2399 has generated cash from operations of CN¥215m in the last twelve months, resulting in an operating cash to total debt ratio of 45%, indicating that 2399’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making companies since metrics such as return on asset (ROA) requires positive earnings. In 2399’s case, it is able to generate 0.45x cash from its debt capital.
Can 2399 pay its short-term liabilities?
At the current liabilities level of CN¥667m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of CN¥876m, with a current ratio of 1.31x. Usually, for Luxury companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does 2399 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 33%, 2399’s debt level may be seen as prudent. 2399 is not taking on too much debt commitment, which may be constraining for future growth. Investors’ risk associated with debt is very low with 2399, and the company has plenty of headroom and ability to raise debt should it need to in the future.
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2399 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how 2399 has been performing in the past. You should continue to research China Fordoo Holdings to get a better picture of the stock by looking at: