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China Candy Holdings Limited (SEHK:8182) is a small-cap stock with a market capitalization of HK$151.42M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Given that 8182 is not presently profitable, it’s essential to evaluate the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. However, since I only look at basic financial figures, I recommend you dig deeper yourself into 8182 here.
How does 8182’s operating cash flow stack up against its debt?
Over the past year, 8182 has maintained its debt levels at around CN¥57.26M made up of predominantly near term debt. At this stable level of debt, 8182 currently has CN¥44.89M remaining in cash and short-term investments , ready to deploy into the business. On top of this, 8182 has produced cash from operations of CN¥10.52M over the same time period, leading to an operating cash to total debt ratio of 18.37%, signalling that 8182’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In 8182’s case, it is able to generate 0.18x cash from its debt capital.
Can 8182 pay its short-term liabilities?
Looking at 8182’s most recent CN¥73.36M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.11x. Usually, for Food companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can 8182 service its debt comfortably?
With debt reaching 89.80% of equity, 8182 may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since 8182 is currently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
At its current level of cash flow coverage, 8182 has room for improvement to better cushion for events which may require debt repayment. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for 8182’s financial health. Other important fundamentals need to be considered alongside. You should continue to research China Candy Holdings to get a more holistic view of the stock by looking at: