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Investors are always looking for growth in small-cap stocks like Fusen Pharmaceutical Company Limited (HKG:1652), with a market cap of HK$1.8b. However, an important fact which most ignore is: how financially healthy is the business? Pharmaceuticals companies, even ones that are profitable, are inclined towards being higher risk. So, understanding the company’s financial health becomes crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into 1652 here.
How much cash does 1652 generate through its operations?
1652 has shrunken its total debt levels in the last twelve months, from CN¥547m to CN¥285m – this includes both the current and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at CN¥363m , ready to deploy into the business. Moreover, 1652 has produced CN¥82m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 29%, signalling that 1652’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 1652’s case, it is able to generate 0.29x cash from its debt capital.
Can 1652 pay its short-term liabilities?
Looking at 1652’s most recent CN¥544m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.24x. Usually, for Pharmaceuticals companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can 1652 service its debt comfortably?
Since total debt levels have outpaced equities, 1652 is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In 1652’s case, the ratio of 10.86x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
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Although 1652’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. Since there is also no concerns around 1652’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure 1652 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Fusen Pharmaceutical to get a more holistic view of the small-cap by looking at: