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While small-cap stocks, such as Amax International Holdings Limited (HKG:959) with its market cap of HK$172m, 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 959 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. However, since I only look at basic financial figures, I suggest you dig deeper yourself into 959 here.
How does 959’s operating cash flow stack up against its debt?
Over the past year, 959 has ramped up its debt from HK$195m to HK$214m – this includes both the current and long-term debt. With this increase in debt, 959 currently has HK$2m remaining in cash and short-term investments , ready to deploy 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 take a look at some of 959’s operating efficiency ratios such as ROA here.
Does 959’s liquid assets cover its short-term commitments?
With current liabilities at HK$216m, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.25x.
Can 959 service its debt comfortably?
959 is a relatively highly levered company with a debt-to-equity of 59%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. However, since 959 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.
Next Steps:
959’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Furthermore, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how 959 has been performing in the past. I recommend you continue to research Amax International Holdings to get a more holistic view of the stock by looking at:
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Historical Performance: What has 959’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.