While small-cap stocks, such as China Baofeng (International) Limited (HKG:3966) with its market cap of HK$1.75b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Consumer Durables businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into 3966 here.
Does 3966 produce enough cash relative to debt?
3966’s debt levels have fallen from HK$269.5m to HK$250.0m over the last 12 months made up of predominantly near term debt. With this reduction in debt, 3966’s cash and short-term investments stands at HK$66.2m , 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 take a look at some of 3966’s operating efficiency ratios such as ROA here.
Does 3966’s liquid assets cover its short-term commitments?
At the current liabilities level of HK$366.0m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of HK$1.30b, with a current ratio of 3.55x. However, anything about 3x may be excessive, since 3966 may be leaving too much capital in low-earning investments.
Can 3966 service its debt comfortably?
3966’s level of debt is appropriate relative to its total equity, at 20.0%. 3966 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders.
Next Steps:
Although 3966’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. I admit this is a fairly basic analysis for 3966’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research China Baofeng (International) to get a better picture of the stock by looking at:
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Future Outlook: What are well-informed industry analysts predicting for 3966’s future growth? Take a look at our free research report of analyst consensus for 3966’s outlook.
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Historical Performance: What has 3966’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.