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While small-cap stocks, such as China Uptown Group Company Limited (HKG:2330) with its market cap of HK$307m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since 2330 is loss-making right now, it’s vital to evaluate the current state of its operations and pathway to profitability. 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 2330 here.
Does 2330 produce enough cash relative to debt?
2330 has built up its total debt levels in the last twelve months, from CN¥84m to CN¥153m , which is mainly comprised of near term debt. With this rise in debt, the current cash and short-term investment levels stands at CN¥103m , ready to deploy into the business. Moreover, 2330 has produced CN¥28m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 19%, meaning that 2330’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making companies since metrics such as return on asset (ROA) requires positive earnings. In 2330’s case, it is able to generate 0.19x cash from its debt capital.
Can 2330 pay its short-term liabilities?
With current liabilities at CN¥885m, it appears that the company has been able to meet these obligations given the level of current assets of CN¥1.4b, with a current ratio of 1.59x. Usually, for Real Estate companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is 2330’s debt level acceptable?
With a debt-to-equity ratio of 27%, 2330’s debt level may be seen as prudent. 2330 is not taking on too much debt commitment, which may be constraining for future growth. Risk around debt is very low for 2330, and the company also has the ability and headroom to increase debt if needed going forward.
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2330’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. However, 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 2330 has been performing in the past. I recommend you continue to research China Uptown Group to get a better picture of the stock by looking at: