Investors are always looking for growth in small-cap stocks like Citychamp Watch & Jewellery Group Limited (SEHK:256), with a market cap of HK$7.31B. However, an important fact which most ignore is: how financially healthy is the business? Given that 256 is not presently profitable, it’s crucial to evaluate the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into 256 here.

Does 256 generate an acceptable amount of cash through operations?

Over the past year, 256 has ramped up its debt from HK$1.65B to HK$1.97B – this includes both the current and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at HK$5.43B , 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 assess some of 256’s operating efficiency ratios such as ROA here.

Can 256 meet its short-term obligations with the cash in hand?

With current liabilities at HK$12.20B, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.18x. For Luxury companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Does 256 face the risk of succumbing to its debt-load?

With debt reaching 41.90% of equity, 256 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. Though, since 256 is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

At its current level of cash flow coverage, 256 has room for improvement to better cushion for events which may require debt repayment. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure 256 has company-specific issues impacting its capital structure decisions. You should continue to research Citychamp Watch & Jewellery Group to get a more holistic view of the stock by looking at: