Investors are always looking for growth in small-cap stocks like South China Assets Holdings Limited (SEHK:8155), with a market cap of HK$528.45M. However, an important fact which most ignore is: how financially healthy is the business? Since 8155 is loss-making right now, it’s essential to assess the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 8155 here.

Does 8155 generate an acceptable amount of cash through operations?

Over the past year, 8155 has maintained its debt levels at around HK$551.8M – this includes both the current and long-term debt. At this current level of debt, 8155 currently has HK$68.1M remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of 8155’s operating efficiency ratios such as ROA here.

Can 8155 pay its short-term liabilities?

At the current liabilities level of HK$254.9M liabilities, it appears that the company has been able to meet these commitments with a current assets level of HK$507.1M, leading to a 1.99x current account ratio. For Real Estate 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.

Is 8155’s debt level acceptable?

8155 is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since 8155 is presently loss-making, 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:

8155’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. This is only a rough assessment of financial health, and I’m sure 8155 has company-specific issues impacting its capital structure decisions. I recommend you continue to research South China Assets Holdings to get a better picture of the stock by looking at:

• 1. Historical Performance: What has 8155’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

• 2. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.