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Investors are always looking for growth in small-cap stocks like Asia Fashion Holdings Limited (SGX:BQI), with a market cap of S$5.99M. However, an important fact which most ignore is: how financially healthy is the business? Since BQI is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I recommend you dig deeper yourself into BQI here.
Does BQI generate enough cash through operations?
Over the past year, BQI has maintained its debt levels at around CN¥22.29M made up of current and long term debt. At this constant level of debt, BQI currently has CN¥112.12M remaining in cash and short-term investments , ready to deploy into the business. On top of this, BQI has generated CN¥97.14M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 435.85%, indicating that BQI’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires positive earnings. In BQI’s case, it is able to generate 4.36x cash from its debt capital.
Does BQI’s liquid assets cover its short-term commitments?
At the current liabilities level of CN¥163.02M liabilities, the company has been able to meet these obligations given the level of current assets of CN¥201.94M, with a current ratio of 1.24x. For Retail Distributors companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is BQI’s debt level acceptable?
With a debt-to-equity ratio of 80.17%, BQI can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since BQI is currently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
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Although BQI’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure BQI has company-specific issues impacting its capital structure decisions. You should continue to research Asia Fashion Holdings to get a better picture of the small-cap by looking at: