Champion Technology Holdings Limited (SEHK:92) is a small-cap stock with a market capitalization of HK$519.71M. 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, in particular ones that run negative earnings, tend to be high risk. Evaluating financial health as part of your investment thesis is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into 92 here.
How does 92’s operating cash flow stack up against its debt?
92’s debt levels surged from HK$198.4M to HK$213.6M over the last 12 months , which comprises of short- and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at HK$122.0M 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. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of 92’s operating efficiency ratios such as ROA here.
Can 92 pay its short-term liabilities?
With current liabilities at HK$293.6M, it appears that the company has been able to meet these commitments with a current assets level of HK$4,423.4M, leading to a 15.07x current account ratio. However, anything about 3x may be excessive, since 92 may be leaving too much capital in low-earning investments.
Can 92 service its debt comfortably?
92’s level of debt is low relative to its total equity, at 5.20%. This range is considered safe as 92 is not taking on too much debt obligation, which may be constraining for future growth. Risk around debt is extremely low for 92, and the company also has the ability and headroom to increase debt if needed going forward.
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92’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure 92 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Champion Technology Holdings to get a more holistic view of the stock by looking at: