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While small-cap stocks, such as Qilu Expressway Company Limited (HKG:1576) with its market cap of HK$3.4b, 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 vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I recommend you dig deeper yourself into 1576 here.
How does 1576’s operating cash flow stack up against its debt?
1576 has shrunken its total debt levels in the last twelve months, from CN¥1.1b to CN¥755m , which comprises of short- and long-term debt. With this debt payback, 1576’s cash and short-term investments stands at CN¥369m for investing into the business. On top of this, 1576 has produced CN¥554m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 73%, meaning that 1576’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 1576’s case, it is able to generate 0.73x cash from its debt capital.
Can 1576 meet its short-term obligations with the cash in hand?
With current liabilities at CN¥729m, the company may not be able to easily meet these obligations given the level of current assets of CN¥582m, with a current ratio of 0.8x.
Does 1576 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 33%, 1576’s debt level may be seen as prudent. 1576 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether 1576 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 1576’s, case, the ratio of 16.76x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving 1576 ample headroom to grow its debt facilities.
Next Steps:
1576’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. However, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for 1576’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Qilu Expressway to get a more holistic view of the stock by looking at: