While small-cap stocks, such as Viva China Holdings Limited (HKG:8032) with its market cap of HK$7.70b, 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 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. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into 8032 here.
How does 8032’s operating cash flow stack up against its debt?
8032 has shrunken its total debt levels in the last twelve months, from HK$1.15b to HK$824.0m – this includes both the current and long-term debt. With this debt repayment, 8032 currently has HK$701.9m remaining in cash and short-term investments , ready to deploy into the business. Moreover, 8032 has produced cash from operations of HK$127.9m in the last twelve months, resulting in an operating cash to total debt ratio of 15.5%, meaning that 8032’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 8032’s case, it is able to generate 0.16x cash from its debt capital.
Does 8032’s liquid assets cover its short-term commitments?
Looking at 8032’s most recent HK$351.6m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of HK$1.39b, with a current ratio of 3.95x. However, a ratio greater than 3x may be considered as too high, as 8032 could be holding too much capital in a low-return investment environment.
Can 8032 service its debt comfortably?
With a debt-to-equity ratio of 20.1%, 8032’s debt level may be seen as prudent. This range is considered safe as 8032 is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether 8032 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 8032’s, case, the ratio of less than 0.1x suggests is not appropriately covered lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
8032’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 will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure 8032 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Viva China Holdings to get a more holistic view of the stock by looking at: