While small-cap stocks, such as Ban Loong Holdings Limited (HKG:30) with its market cap of HK$1.0b, 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 Consumer Retailing industry facing headwinds from current disruption, especially ones that are currently loss-making, are inclined towards being higher risk. Assessing first and foremost the financial health is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into 30 here.
Does 30 produce enough cash relative to debt?
Over the past year, 30 has maintained its debt levels at around HK$72m . At this constant level of debt, 30 currently has HK$145m remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of 30’s operating efficiency ratios such as ROA here.
Can 30 meet its short-term obligations with the cash in hand?
At the current liabilities level of HK$181m liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 4.04x. However, a ratio greater than 3x may be considered as quite high, and some might argue 30 could be holding too much capital in a low-return investment environment.
Can 30 service its debt comfortably?
With a debt-to-equity ratio of 13%, 30’s debt level may be seen as prudent. 30 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. 30’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
Next Steps:
Although 30’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure 30 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Ban Loong Holdings to get a better picture of the stock by looking at: