Boyuan Holdings Limited (ASX:BHL) is a small-cap stock with a market capitalization of AU$58m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Understanding the company's financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, potential investors would need to take a closer look, and I suggest you dig deeper yourself into BHL here.
BHL’s Debt (And Cash Flows)
Over the past year, BHL has reduced its debt from AU$68m to AU$53m – this includes long-term debt. With this debt payback, the current cash and short-term investment levels stands at AU$4.0m , ready to be used for running the business. Moving on, operating cash flow was negative over the last twelve months. 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 BHL’s operating efficiency ratios such as ROA here.
Can BHL pay its short-term liabilities?
At the current liabilities level of AU$33m, the company may not have an easy time meeting these commitments with a current assets level of AU$32m, leading to a current ratio of 0.98x. The current ratio is the number you get when you divide current assets by current liabilities.
Can BHL service its debt comfortably?
With a debt-to-equity ratio of 93%, BHL can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether BHL 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 BHL's, case, the ratio of 3.4x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving BHL ample headroom to grow its debt facilities.
Next Steps:
Although BHL’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I'm sure BHL has company-specific issues impacting its capital structure decisions. I suggest you continue to research Boyuan Holdings to get a more holistic view of the stock by looking at: