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Q Technology (Group) Company Limited (HKG:1478) is a small-cap stock with a market capitalization of HK$5.4b. 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 Consumer Durables industry facing headwinds from current disruption, even ones that are profitable, 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. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into 1478 here.
How does 1478’s operating cash flow stack up against its debt?
Over the past year, 1478 has ramped up its debt from CN¥142m to CN¥1.3b . With this growth in debt, the current cash and short-term investment levels stands at CN¥245m for investing into the business. Moreover, 1478 has produced cash from operations of CN¥717m in the last twelve months, leading to an operating cash to total debt ratio of 55%, meaning that 1478’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 1478’s case, it is able to generate 0.55x cash from its debt capital.
Can 1478 meet its short-term obligations with the cash in hand?
Looking at 1478’s most recent CN¥3.9b liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.02x. Generally, for Consumer Durables companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does 1478 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 64%, 1478 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. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In 1478’s case, the ratio of 15.34x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as 1478’s high interest coverage is seen as responsible and safe practice.