Investors are always looking for growth in small-cap stocks like China Fortune Investments (Holding) Limited (SEHK:8116), with a market cap of HK$284.92M. However, an important fact which most ignore is: how financially healthy is the business? Consumer Retailing businesses operating in the environment facing headwinds from current disruption, especially ones that are currently loss-making, are more likely to be 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, this commentary is still very high-level, so I recommend you dig deeper yourself into 8116 here.
How does 8116’s operating cash flow stack up against its debt?
Over the past year, 8116 has ramped up its debt from HK$213.7M to HK$247.6M , which comprises of short- and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at HK$196.7M , ready to deploy into the business. However, 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. For this article’s sake, I won’t be looking at this today, but you can take a look at some of 8116’s operating efficiency ratios such as ROA here.
Can 8116 meet its short-term obligations with the cash in hand?
At the current liabilities level of HK$88.2M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of HK$407.8M, with a current ratio of 4.62x. Though, a ratio greater than 3x may be considered as too high, as 8116 could be holding too much capital in a low-return investment environment.
Can 8116 service its debt comfortably?
With a debt-to-equity ratio of 35.20%, 8116’s debt level may be seen as prudent. This range is considered safe as 8116 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Risk around debt is very low for 8116, and the company also has the ability and headroom to increase debt if needed going forward.
Next Steps:
Are you a shareholder? 8116’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. Given that 8116’s financial situation may change. You should always be researching market expectations for 8116’s future growth on our free analysis platform.