While small-cap stocks, such as China e-Wallet Payment Group Limited (SEHK:802) with its market cap of HK$1.10B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Software industry, in particular ones that run negative earnings, are inclined towards being higher risk. So, understanding the company’s financial health becomes essential. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into 802 here.
How does 802’s operating cash flow stack up against its debt?
Over the past year, 802 has borrowed debt capital of around HK$105.0M made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at HK$624.6M , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. 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 802’s operating efficiency ratios such as ROA here.
Does 802’s liquid assets cover its short-term commitments?
At the current liabilities level of HK$64.9M liabilities, it appears that the company has been able to meet these commitments with a current assets level of HK$860.2M, leading to a 13.25x current account ratio. However, anything about 3x may be excessive, since 802 may be leaving too much capital in low-earning investments.
Does 802 face the risk of succumbing to its debt-load?
With debt at 10.61% of equity, 802 may be thought of as appropriately levered. 802 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. 802’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
Next Steps:
802’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 exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how 802 has been performing in the past. You should continue to research China e-Wallet Payment Group to get a better picture of the stock by looking at: