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While small-cap stocks, such as Goodbaby International Holdings Limited (HKG:1086) with its market cap of HK$4.6b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. 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. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I recommend you dig deeper yourself into 1086 here.
How much cash does 1086 generate through its operations?
1086 has built up its total debt levels in the last twelve months, from HK$1.5b to HK$2.6b , which is made up of current and long term debt. With this rise in debt, the current cash and short-term investment levels stands at HK$831m for investing into the business. On top of this, 1086 has generated cash from operations of HK$324m in the last twelve months, leading to an operating cash to total debt ratio of 12%, meaning that 1086’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 1086’s case, it is able to generate 0.12x cash from its debt capital.
Can 1086 meet its short-term obligations with the cash in hand?
At the current liabilities level of HK$3.3b liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.25x. For Leisure companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Is 1086’s debt level acceptable?
With debt reaching 51% of equity, 1086 may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether 1086 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 1086’s, case, the ratio of 4.1x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 1086 ample headroom to grow its debt facilities.
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1086’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 an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure 1086 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Goodbaby International Holdings to get a better picture of the stock by looking at: