While small-cap stocks, such as The Hong Kong Building And Loan Agency Limited (SEHK:145) with its market cap of HK$186.83M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that 145 is not presently profitable, it’s essential to understand 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 145 here.
Does 145 generate enough cash through operations?
Over the past year, 145 has ramped up its debt from HK$563.93M to HK$625.41M , which comprises of short- and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at HK$57.11M , 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 145’s operating efficiency ratios such as ROA here.
Does 145’s liquid assets cover its short-term commitments?
At the current liabilities level of HK$159.49M liabilities, it appears that the company is not able to meet these obligations given the level of current assets of HK$142.41M, with a current ratio of 0.89x below the prudent level of 3x.
Does 145 face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, 145 is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since 145 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:
With a high level of debt on its balance sheet, 145 could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for 145 to increase its operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for 145’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Hong Kong Building And Loan Agency to get a better picture of the stock by looking at: