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While small-cap stocks, such as China Oceanwide Holdings Limited (HKG:715) with its market cap of HK$6.1b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, 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. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into 715 here.
Does 715 produce enough cash relative to debt?
Over the past year, 715 has ramped up its debt from HK$6.1b to HK$9.9b , which is made up of current and long term debt. With this increase in debt, 715’s cash and short-term investments stands at HK$465m , ready to deploy 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 715’s operating efficiency ratios such as ROA here.
Can 715 meet its short-term obligations with the cash in hand?
Looking at 715’s most recent HK$10.5b liabilities, the company has been able to meet these commitments with a current assets level of HK$14.9b, leading to a 1.42x current account ratio. Generally, for Real Estate companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does 715 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 88%, 715 can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses.
Next Steps:
715’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how 715 has been performing in the past. I recommend you continue to research China Oceanwide Holdings to get a better picture of the stock by looking at:
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Future Outlook: What are well-informed industry analysts predicting for 715’s future growth? Take a look at our free research report of analyst consensus for 715’s outlook.
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Historical Performance: What has 715’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.
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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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.