While small-cap stocks, such as Success Dragon International Holdings Limited (SEHK:1182) with its market cap of HK$891.68M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since 1182 is loss-making right now, it’s crucial to evaluate the current state of its operations and pathway to profitability. 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’d encourage you to dig deeper yourself into 1182 here.

Does 1182 generate an acceptable amount of cash through operations?

Over the past year, 1182 has ramped up its debt from HK$10.44M to HK$17.39M , which comprises of short- and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at HK$19.07M for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. 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 1182’s operating efficiency ratios such as ROA here.

Can 1182 meet its short-term obligations with the cash in hand?

At the current liabilities level of HK$23.52M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of HK$27.30M, with a current ratio of 1.16x. Generally, for Hospitality companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Is 1182’s debt level acceptable?

1182’s level of debt is appropriate relative to its total equity, at 10.59%. 1182 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. 1182’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.

Next Steps:

1182’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for 1182’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Success Dragon International Holdings to get a better picture of the stock by looking at: