While small-cap stocks, such as Kirin Group Holdings Limited (SEHK:8109) with its market cap of HK$93.11M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since 8109 is loss-making right now, it’s crucial to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into 8109 here.
How does 8109’s operating cash flow stack up against its debt?
Over the past year, 8109 has ramped up its debt from CN¥59.7M to CN¥185.6M , which is made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at CN¥19.2M 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. 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 8109’s operating efficiency ratios such as ROA here.
Can 8109 pay its short-term liabilities?
At the current liabilities level of CN¥172.4M liabilities, it seems that the business has been able to meet these commitments with a current assets level of CN¥192.0M, leading to a 1.11x current account ratio. Usually, for Building companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can 8109 service its debt comfortably?
8109 is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since 8109 is currently 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.
Next Steps:
8109’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. I admit this is a fairly basic analysis for 8109’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Kirin Group Holdings to get a better picture of the stock by looking at: