While small-cap stocks, such as Ruixin International Holdings Limited (SEHK:724) with its market cap of HK$277.78M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Semiconductor companies, especially ones that are currently loss-making, tend to be high risk. So, understanding the company’s financial health becomes essential. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into 724 here.
How does 724’s operating cash flow stack up against its debt?
724’s debt levels have fallen from HK$262.90M to HK$244.49M over the last 12 months , which comprises of short- and long-term debt. With this debt payback, 724 currently has HK$45.51M remaining in cash and short-term investments for investing into the business. On top of this, 724 has produced HK$4.71M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 1.93%, indicating that 724’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable businesses since metrics such as return on asset (ROA) requires a positive net income. In 724’s case, it is able to generate 0.019x cash from its debt capital.
Does 724’s liquid assets cover its short-term commitments?
With current liabilities at HK$94.31M, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.28x. Though, a ratio greater than 3x may be considered as too high, as 724 could be holding too much capital in a low-return investment environment.
Does 724 face the risk of succumbing to its debt-load?
724 is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since 724 is currently unprofitable, sustainability of its current state of operations becomes a concern. 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, 724 has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure 724 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Ruixin International Holdings to get a better picture of the stock by looking at: