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Baoye Group Company Limited (HKG:2355) is a small-cap stock with a market capitalization of CN¥2.26b. 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? So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into 2355 here.
How does 2355’s operating cash flow stack up against its debt?
2355 has built up its total debt levels in the last twelve months, from CN¥536.80m to CN¥2.33b , which is made up of current and long term debt. With this rise in debt, 2355 currently has CN¥2.92b remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of 2355’s operating efficiency ratios such as ROA here.
Can 2355 meet its short-term obligations with the cash in hand?
With current liabilities at CN¥20.31b, it seems that the business has been able to meet these obligations given the level of current assets of CN¥23.87b, with a current ratio of 1.18x. For Construction companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Can 2355 service its debt comfortably?
2355’s level of debt is appropriate relative to its total equity, at 31.08%. This range is considered safe as 2355 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders.
Next Steps:
2355’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 proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure 2355 has company-specific issues impacting its capital structure decisions. You should continue to research Baoye Group to get a more holistic view of the stock by looking at: