ZMFY Automobile Glass Services Limited (SEHK:8135) is a small-cap stock with a market capitalization of HK$388.67M. 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? Specialty Retail businesses operating in the environment facing headwinds from current disruption, in particular ones that run negative earnings, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into 8135 here.
How does 8135’s operating cash flow stack up against its debt?
8135 has built up its total debt levels in the last twelve months, from CN¥3.88M to CN¥4.45M – this includes both the current and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at CN¥28.54M for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, 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 examine some of 8135’s operating efficiency ratios such as ROA here.
Can 8135 meet its short-term obligations with the cash in hand?
With current liabilities at CN¥16.11M, it seems that the business has been able to meet these commitments with a current assets level of CN¥87.09M, leading to a 5.41x current account ratio. However, a ratio greater than 3x may be considered as too high, as 8135 could be holding too much capital in a low-return investment environment.
Can 8135 service its debt comfortably?
With a debt-to-equity ratio of 48.29%, 8135 can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since 8135 is presently 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:
8135’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. 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 8135’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research ZMFY Automobile Glass Services to get a better picture of the stock by looking at: