While small-cap stocks, such as China Candy Holdings Limited (SEHK:8182) with its market cap of HK$151.42M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since 8182 is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into 8182 here.
Does 8182 generate an acceptable amount of cash through operations?
8182 has sustained its debt level by about CN¥57.3M over the last 12 months , which is mainly comprised of near term debt. At this current level of debt, 8182 currently has CN¥44.9M remaining in cash and short-term investments for investing into the business. On top of this, 8182 has produced CN¥10.5M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 18.37%, signalling that 8182’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In 8182’s case, it is able to generate 0.18x cash from its debt capital.
Can 8182 pay its short-term liabilities?
With current liabilities at CN¥73.4M liabilities, the company has been able to meet these obligations given the level of current assets of CN¥81.7M, with a current ratio of 1.11x. Generally, for food companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does 8182 face the risk of succumbing to its debt-load?
With debt reaching 89.80% of equity, 8182 may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since 8182 is currently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Are you a shareholder? At its current level of cash flow coverage, 8182 has room for improvement to better cushion for events which may require debt repayment. Though, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. Given that 8182’s financial situation may change. I suggest keeping abreast of market expectations for 8182’s future growth on our free analysis platform.