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While small-cap stocks, such as China Partytime Culture Holdings Limited (HKG:1532) with its market cap of HK$417m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into 1532 here.
Does 1532 produce enough cash relative to debt?
1532’s debt level has been constant at around CN¥67m over the previous year , which is mainly comprised of near term debt. At this current level of debt, 1532 currently has CN¥107m remaining in cash and short-term investments for investing into the business. Moreover, 1532 has generated CN¥50m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 75%, indicating that 1532’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 1532’s case, it is able to generate 0.75x cash from its debt capital.
Can 1532 meet its short-term obligations with the cash in hand?
With current liabilities at CN¥137m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.35x. Generally, for Luxury companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does 1532 face the risk of succumbing to its debt-load?
With debt at 13% of equity, 1532 may be thought of as appropriately levered. 1532 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if 1532’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 1532, the ratio of 2.52x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
1532 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, 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 1532’s financial health. Other important fundamentals need to be considered alongside. You should continue to research China Partytime Culture Holdings to get a more holistic view of the stock by looking at: