China International Holdings Limited (SGX:BEH) is a small-cap stock with a market capitalization of S$35.62M. 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? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I suggest you dig deeper yourself into BEH here.
How does BEH’s operating cash flow stack up against its debt?
BEH’s debt levels have fallen from CN¥493.40M to CN¥173.31M over the last 12 months – this includes both the current and long-term debt. With this debt payback, BEH’s cash and short-term investments stands at CN¥168.52M for investing into the business. On top of this, BEH has generated cash from operations of CN¥17.52M in the last twelve months, resulting in an operating cash to total debt ratio of 10.11%, indicating that BEH’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In BEH’s case, it is able to generate 0.1x cash from its debt capital.
Can BEH meet its short-term obligations with the cash in hand?
Looking at BEH’s most recent CN¥824.69M liabilities, the company has been able to meet these obligations given the level of current assets of CN¥1.15B, with a current ratio of 1.39x. Generally, for Water Utilities companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is BEH’s debt level acceptable?
With a debt-to-equity ratio of 26.29%, BEH’s debt level may be seen as prudent. BEH is not taking on too much debt commitment, which may be constraining for future growth.
Next Steps:
BEH’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure BEH has company-specific issues impacting its capital structure decisions. I recommend you continue to research China International Holdings to get a better picture of the stock by looking at: