While small-cap stocks, such as Pizu Group Holdings Limited (SEHK:8053) with its market cap of HK$2.10B, 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 crucial, 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. Though, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into 8053 here.
Does 8053 generate an acceptable amount of cash through operations?
8053 has built up its total debt levels in the last twelve months, from CN¥85.58M to CN¥188.50M , which is made up of current and long term debt. With this increase in debt, 8053 currently has CN¥127.81M remaining in cash and short-term investments for investing into the business. Moreover, 8053 has produced CN¥47.63M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 25.27%, indicating that 8053’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 8053’s case, it is able to generate 0.25x cash from its debt capital.
Can 8053 pay its short-term liabilities?
With current liabilities at CN¥257.69M, it appears that the company has been able to meet these obligations given the level of current assets of CN¥371.76M, with a current ratio of 1.44x. For Trade Distributors companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does 8053 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 46.29%, 8053 can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether 8053 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 8053’s, case, the ratio of 73.72x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as 8053’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although 8053’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how 8053 has been performing in the past. You should continue to research Pizu Group Holdings to get a better picture of the small-cap by looking at: