Yashili International Holdings Ltd (HKG:1230) is a small-cap stock with a market capitalization of HK$6.3b. 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? Since 1230 is loss-making right now, it’s vital 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. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into 1230 here.
How much cash does 1230 generate through its operations?
Over the past year, 1230 has reduced its debt from CN¥1.1b to CN¥559m , which is mainly comprised of near term debt. With this reduction in debt, 1230 currently has CN¥2.7b 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. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of 1230’s operating efficiency ratios such as ROA here.
Does 1230’s liquid assets cover its short-term commitments?
At the current liabilities level of CN¥2.0b, the company has been able to meet these obligations given the level of current assets of CN¥4.1b, with a current ratio of 2.07x. Usually, for Food companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does 1230 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 10%, 1230’s debt level may be seen as prudent. This range is considered safe as 1230 is not taking on too much debt obligation, which may be constraining for future growth. Risk around debt is very low for 1230, and the company also has the ability and headroom to increase debt if needed going forward.
Next Steps:
1230’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure 1230 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Yashili International Holdings to get a better picture of the stock by looking at: