Investors are always looking for growth in small-cap stocks like Tian Chang Group Holdings Ltd (HKG:2182), with a market cap of HK$272.8m. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to 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 suggest you dig deeper yourself into 2182 here.

How does 2182’s operating cash flow stack up against its debt?

Over the past year, 2182 has maintained its debt levels at around HK$288.5m made up of current and long term debt. At this current level of debt, 2182’s cash and short-term investments stands at HK$81.6m , 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 examine some of 2182’s operating efficiency ratios such as ROA here.

Can 2182 meet its short-term obligations with the cash in hand?

Looking at 2182’s most recent HK$348.5m liabilities, it seems that the business is not able to meet these obligations given the level of current assets of HK$290.4m, with a current ratio of 0.83x below the prudent level of 3x.

Does 2182 face the risk of succumbing to its debt-load?

With a debt-to-equity ratio of 75.8%, 2182 can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if 2182’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 2182, the ratio of 4.69x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 2182 ample headroom to grow its debt facilities.

Next Steps:

At its current level of cash flow coverage, 2182 has room for improvement to better cushion for events which may require debt repayment. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how 2182 has been performing in the past. I suggest you continue to research Tian Chang Group Holdings to get a better picture of the stock by looking at: