China Goldjoy Group Limited (HKG:1282) is a small-cap stock with a market capitalization of HK$11.77b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Companies operating in the Tech industry, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into 1282 here.
Does 1282 produce enough cash relative to debt?
Over the past year, 1282 has ramped up its debt from HK$913.2m to HK$2.02b , which is made up of current and long term debt. With this increase in debt, 1282 currently has HK$3.03b remaining in cash and short-term investments for investing 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. For this article’s sake, I won’t be looking at this today, but you can take a look at some of 1282’s operating efficiency ratios such as ROA here.
Can 1282 meet its short-term obligations with the cash in hand?
With current liabilities at HK$4.44b, it seems that the business has been able to meet these obligations given the level of current assets of HK$6.80b, with a current ratio of 1.53x. Generally, for Tech companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is 1282’s debt level acceptable?
With debt at 28.0% of equity, 1282 may be thought of as appropriately levered. This range is considered safe as 1282 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if 1282’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 1282, the ratio of 53.99x suggests that interest is comfortably 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.
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1282’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 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 1282’s financial health. Other important fundamentals need to be considered alongside. You should continue to research China Goldjoy Group to get a more holistic view of the stock by looking at: