Investors are always looking for growth in small-cap stocks like Changhong Jiahua Holdings Limited (HKG:8016), with a market cap of HK$1.7b. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Electronic industry, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, this commentary is still very high-level, so I suggest you dig deeper yourself into 8016 here.
How does 8016’s operating cash flow stack up against its debt?
8016 has built up its total debt levels in the last twelve months, from HK$806m to HK$1.1b . With this increase in debt, 8016 currently has HK$219m remaining in cash and short-term investments , 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 assess some of 8016’s operating efficiency ratios such as ROA here.
Can 8016 meet its short-term obligations with the cash in hand?
Looking at 8016’s most recent HK$2.9b liabilities, it seems that the business has been able to meet these commitments with a current assets level of HK$4.5b, leading to a 1.54x current account ratio. Generally, for Electronic companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does 8016 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 65%, 8016 can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if 8016’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 8016, the ratio of 9.75x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
8016’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. I admit this is a fairly basic analysis for 8016’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Changhong Jiahua Holdings to get a more holistic view of the stock by looking at: