Investors are always looking for growth in small-cap stocks like Dahe Media Co Ltd (HKG:8243), with a market cap of HK$112m. However, an important fact which most ignore is: how financially healthy is the business? 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. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I suggest you dig deeper yourself into 8243 here.
How does 8243’s operating cash flow stack up against its debt?
Over the past year, 8243 has ramped up its debt from CN¥260m to CN¥308m . With this increase in debt, the current cash and short-term investment levels stands at CN¥53m for investing 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. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of 8243’s operating efficiency ratios such as ROA here.
Can 8243 pay its short-term liabilities?
With current liabilities at CN¥427m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.63x. Usually, for Media 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.
Does 8243 face the risk of succumbing to its debt-load?
8243 is a relatively highly levered company with a debt-to-equity of 75%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In 8243’s case, the ratio of 3.09x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
At its current level of cash flow coverage, 8243 has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for 8243’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Dahe Media to get a more holistic view of the stock by looking at: