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While small-cap stocks, such as Sanai Health Industry Group Company Limited (HKG:1889) with its market cap of HK$997m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Pharmaceuticals industry, especially ones that are currently loss-making, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into 1889 here.
Does 1889 produce enough cash relative to debt?
1889 has built up its total debt levels in the last twelve months, from CN¥240m to CN¥279m . With this rise in debt, the current cash and short-term investment levels stands at CN¥160m , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, 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 take a look at some of 1889’s operating efficiency ratios such as ROA here.
Does 1889’s liquid assets cover its short-term commitments?
Looking at 1889’s CN¥307m in current liabilities, the company has been able to meet these commitments with a current assets level of CN¥316m, leading to a 1.03x current account ratio. Generally, for Pharmaceuticals companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does 1889 face the risk of succumbing to its debt-load?
With total debt exceeding equities, 1889 is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since 1889 is presently loss-making, 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.
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1889’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for 1889’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Sanai Health Industry Group to get a better picture of the small-cap by looking at: