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Investors are always looking for growth in small-cap stocks like Zhong Fa Zhan Holdings Limited (SEHK:475), with a market cap of HK$386.16M. However, an important fact which most ignore is: how financially healthy is the business? Given that 475 is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into 475 here.
Does 475 generate an acceptable amount of cash through operations?
In the most recent balance sheet, 475 has borrowed debt capital of around HK$64.61M made up of predominantly near term debt. With this ramp up in debt, 475’s cash and short-term investments stands at HK$38.68M for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can assess some of 475’s operating efficiency ratios such as ROA here.
Can 475 pay its short-term liabilities?
At the current liabilities level of HK$1.85M liabilities, it seems that the business has been able to meet these commitments with a current assets level of HK$43.89M, leading to a 23.72x current account ratio. However, a ratio greater than 3x may be considered as too high, as 475 could be holding too much capital in a low-return investment environment.
Is 475’s debt level acceptable?
Since total debt levels have outpaced equities, 475 is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since 475 is presently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
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At its current level of cash flow coverage, 475 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 475 has company-specific issues impacting its capital structure decisions. You should continue to research Zhong Fa Zhan Holdings to get a more holistic view of the stock by looking at: