While small-cap stocks, such as Ping An Securities Group (Holdings) Limited (SEHK:231) with its market cap of HK$1.47B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since 231 is loss-making right now, it’s vital to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into 231 here.
Does 231 generate enough cash through operations?
231’s debt levels surged from HK$315.26M to HK$398.42M over the last 12 months , which comprises of short- and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at HK$164.91M , ready to deploy into the business. Moreover, 231 has generated cash from operations of HK$144.93M in the last twelve months, leading to an operating cash to total debt ratio of 36.38%, meaning that 231’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making businesses since metrics such as return on asset (ROA) requires positive earnings. In 231’s case, it is able to generate 0.36x cash from its debt capital.
Can 231 meet its short-term obligations with the cash in hand?
Looking at 231’s most recent HK$442.90M liabilities, it appears that the company has not been able to meet these commitments with a current assets level of HK$344.37M, leading to a 0.78x current account ratio. which is under the appropriate industry ratio of 3x.
Does 231 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 26.46%, 231’s debt level may be seen as prudent. 231 is not taking on too much debt commitment, which may be constraining for future growth. Investors’ risk associated with debt is very low with 231, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
231’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for 231’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Ping An Securities Group (Holdings) to get a better picture of the stock by looking at: