Netel Technology (Holdings) Limited (SEHK:8256) is a small-cap stock with a market capitalization of HK$43.71M. 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? Companies operating in the Telecom industry facing headwinds from current disruption, especially ones that are currently loss-making, tend to be high risk. Evaluating financial health as part of your investment thesis is essential. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I suggest you dig deeper yourself into 8256 here.

Does 8256 generate an acceptable amount of cash through operations?

8256 has built up its total debt levels in the last twelve months, from HK$896.00K to HK$7.76M , which is made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at HK$4.28M , ready to deploy 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 take a look at some of 8256’s operating efficiency ratios such as ROA here.

Can 8256 pay its short-term liabilities?

Looking at 8256’s most recent HK$5.66M liabilities, it appears that the company has been able to meet these commitments with a current assets level of HK$6.38M, leading to a 1.13x current account ratio. Usually, for Telecom 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.

Is 8256’s debt level acceptable?

With total debt exceeding equities, 8256 is considered a highly levered 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 8256 is currently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

At its current level of cash flow coverage, 8256 has room for improvement to better cushion for events which may require debt repayment. Though, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure 8256 has company-specific issues impacting its capital structure decisions. You should continue to research Netel Technology (Holdings) to get a more holistic view of the stock by looking at: