Investors are always looking for growth in small-cap stocks like Tianli Holdings Group Limited (SEHK:117), with a market cap of HK$997.97M. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Electronic industry, especially ones that are currently loss-making, are inclined towards being higher risk. Assessing first and foremost the financial health is vital. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into 117 here.

Does 117 generate enough cash through operations?

117’s debt levels surged from CN¥415.7M to CN¥733.8M over the last 12 months – this includes both the current and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at CN¥129.7M , ready to deploy 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 examine some of 117’s operating efficiency ratios such as ROA here.

Does 117’s liquid assets cover its short-term commitments?

At the current liabilities level of CN¥645.8M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.11x. For Electronic companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Is 117’s debt level acceptable?

117 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 117 is currently loss-making, sustainability of its current state of operations becomes a concern. 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:

117’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 117 has company-specific issues impacting its capital structure decisions. You should continue to research Tianli Holdings Group to get a more holistic view of the stock by looking at: