Zhuhai Holdings Investment Group Limited (HKG:908) is a small-cap stock with a market capitalization of HK$1.2b. 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 crucial, since poor capital management may bring about 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, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into 908 here.
How does 908’s operating cash flow stack up against its debt?
908’s debt levels surged from CN¥2.7b to CN¥3.0b over the last 12 months , which includes long-term debt. With this rise in debt, the current cash and short-term investment levels stands at CN¥1.2b , ready to deploy into the business. Additionally, 908 has produced CN¥367m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 12%, signalling that 908’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 908’s case, it is able to generate 0.12x cash from its debt capital.
Can 908 pay its short-term liabilities?
At the current liabilities level of CN¥5.7b, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.36x. For Hospitality companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Does 908 face the risk of succumbing to its debt-load?
908 is a relatively highly levered company with a debt-to-equity of 95%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses.
Next Steps:
908’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for 908’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Zhuhai Holdings Investment Group to get a more holistic view of the small-cap by looking at: