Zhong An Real Estate Limited (SEHK:672) is a small-cap stock with a market capitalization of HK$4.03B. 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? Assessing first and foremost the financial health is vital, 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. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into 672 here.

How does 672’s operating cash flow stack up against its debt?

672 has shrunken its total debt levels in the last twelve months, from CN¥6.47B to CN¥5.56B – this includes both the current and long-term debt. With this reduction in debt, 672 currently has CN¥1.00B remaining in cash and short-term investments for investing into the business. Additionally, 672 has generated cash from operations of CN¥591.21M during the same period of time, leading to an operating cash to total debt ratio of 10.62%, meaning that 672’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 672’s case, it is able to generate 0.11x cash from its debt capital.

Does 672’s liquid assets cover its short-term commitments?

Looking at 672’s most recent CN¥8.39B liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.26x. Usually, for Real Estate companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Does 672 face the risk of succumbing to its debt-load?

672 is a relatively highly levered company with a debt-to-equity of 58.28%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses.

Next Steps:

At its current level of cash flow coverage, 672 has room for improvement to better cushion for events which may require debt repayment. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how 672 has been performing in the past. You should continue to research Zhong An Real Estate to get a better picture of the stock by looking at: