While small-cap stocks, such as C&D International Investment Group Limited (SEHK:1908) with its market cap of HK$2.63B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, 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. However, I know these factors are very high-level, so I suggest you dig deeper yourself into 1908 here.
Does 1908 generate enough cash through operations?
1908’s debt levels surged from CN¥119.3M to CN¥1,063.1M over the last 12 months – this includes both the current and long-term debt. With this rise in debt, 1908 currently has CN¥252.0M remaining in cash and short-term investments , ready to deploy into the business. Moreover, 1908 has produced cash from operations of CN¥3.7M during the same period of time, resulting in an operating cash to total debt ratio of 0x, signalling that 1908’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 1908’s case, it is able to generate 0x cash from its debt capital.
Can 1908 meet its short-term obligations with the cash in hand?
With current liabilities at CN¥417.4M liabilities, it seems that the business has been able to meet these commitments with a current assets level of CN¥1,086.8M, leading to a 2.6x current account ratio. Generally, for real estate companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can 1908 service its debt comfortably?
Since total debt levels have outpaced equities, 1908 is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses.
Next Steps:
Are you a shareholder? 1908’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Moving forward, 1908’s financial situation may change. I recommend keeping on top of market expectations for 1908’s future growth on our free analysis platform.
Are you a potential investor? Investors shouldn’t be put off by 1908’s high debt levels based on this simple analysis. High level of cash generated from operating activities indicates its debt funding is being effectively used. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. In order to build your conviction in the stock, you need to further analyse the company’s track record. I encourage you to continue your research by taking a look at 1908’s past performance analysis on our free platform in order to determine for yourself whether its debt position is justified.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.