Investors are always looking for growth in small-cap stocks like AVIC Joy Holdings (HK) Limited (SEHK:260), with a market cap of HK$558.71M. However, an important fact which most ignore is: how financially healthy is the business? Specialty Retail businesses operating in the environment facing headwinds from current disruption, in particular ones that run negative earnings, tend to be high risk. Assessing first and foremost the financial health is essential. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 260 here.

Does 260 generate an acceptable amount of cash through operations?

260’s debt levels have fallen from HK$2.86B to HK$2.56B over the last 12 months , which comprises of short- and long-term debt. With this reduction in debt, 260’s cash and short-term investments stands at HK$153.99M , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, 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 take a look at some of 260’s operating efficiency ratios such as ROA here.

Does 260’s liquid assets cover its short-term commitments?

At the current liabilities level of HK$855.23M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.07x. Generally, for Specialty Retail companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Can 260 service its debt comfortably?

Since total debt levels have outpaced equities, 260 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. However, since 260 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:

260’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 will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for 260’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research AVIC Joy Holdings (HK) to get a better picture of the stock by looking at: