Champion Technology Holdings Limited (SEHK:92) is a small-cap stock with a market capitalization of HK$319.12M. 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? Companies operating in the Communications industry, especially ones that are currently loss-making, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is essential. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I recommend you dig deeper yourself into 92 here.

Does 92 generate enough cash through operations?

92 has built up its total debt levels in the last twelve months, from HK$198.35M to HK$213.61M , which is made up of current and long term debt. With this rise in debt, 92’s cash and short-term investments stands at HK$121.97M 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 92’s operating efficiency ratios such as ROA here.

Can 92 meet its short-term obligations with the cash in hand?

Looking at 92’s most recent HK$293.58M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 15.07x. Though, anything above 3x is considered high and could mean that 92 has too much idle capital in low-earning investments.

Does 92 face the risk of succumbing to its debt-load?

Since total debt levels have outpaced equities, 92 is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since 92 is currently unprofitable, 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.

Next Steps:

92’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. Keep in mind I haven’t considered other factors such as how 92 has been performing in the past. I recommend you continue to research Champion Technology Holdings to get a more holistic view of the stock by looking at:

1. Valuation: What is 92 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 92 is currently mispriced by the market.

2. Historical Performance: What has 92’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.