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While small-cap stocks, such as Enterprise Development Holdings Limited (SEHK:1808) with its market cap of HK$726.58M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. IT companies, in particular ones that run negative earnings, are inclined towards being higher risk. Assessing first and foremost the financial health is vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into 1808 here.
Does 1808 generate enough cash through operations?
Over the past year, 1808 has reduced its debt from CN¥30.25M to CN¥27.74M , which is made up of current and long term debt. With this reduction in debt, 1808’s cash and short-term investments stands at CN¥144.96M , ready to deploy into the business. On top of this, 1808 has generated cash from operations of CN¥3.07M over the same time period, resulting in an operating cash to total debt ratio of 11.07%, meaning that 1808’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires positive earnings. In 1808’s case, it is able to generate 0.11x cash from its debt capital.
Can 1808 meet its short-term obligations with the cash in hand?
With current liabilities at CN¥68.35M, the company has been able to meet these commitments with a current assets level of CN¥319.38M, leading to a 4.67x current account ratio. Though, a ratio greater than 3x may be considered as too high, as 1808 could be holding too much capital in a low-return investment environment.
Is 1808’s debt level acceptable?
1808’s level of debt is low relative to its total equity, at 9.58%. 1808 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. 1808’s risk around capital structure is almost non-existent, and the company has the headroom and ability to raise debt should it need to in the future.
Next Steps:
1808’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 exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how 1808 has been performing in the past. I recommend you continue to research Enterprise Development Holdings to get a better picture of the stock by looking at: