Investors are always looking for growth in small-cap stocks like China Biotech Services Holdings Limited (SEHK:8037), with a market cap of HK$804.98M. However, an important fact which most ignore is: how financially healthy is the business? Healthcare companies, in particular ones that run negative earnings, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is essential. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into 8037 here.
How does 8037’s operating cash flow stack up against its debt?
Over the past year, 8037 has ramped up its debt from HK$1.9M to HK$22.0M – this includes both the current and long-term debt. With this increase in debt, 8037’s cash and short-term investments stands at HK$88.5M for investing into the business. Though 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 8037’s operating efficiency ratios such as ROA here.
Does 8037’s liquid assets cover its short-term commitments?
At the current liabilities level of HK$42.8M 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 3.41x. However, anything above 3x is considered high and could mean that 8037 has too much idle capital in low-earning investments.
Can 8037 service its debt comfortably?
With a debt-to-equity ratio of 9.37%, 8037’s debt level is relatively low. This range is considered safe as 8037 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Risk around debt is extremely low for 8037, and the company also has the ability and headroom to increase debt if needed going forward.
Next Steps:
Are you a shareholder? 8037’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that 8037’s financial situation may change. I recommend keeping on top of market expectations for 8037’s future growth on our free analysis platform.