China Soft Power Technology Holdings Limited (SEHK:139) is a small-cap stock with a market capitalization of HK$2.10B. 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 Electronic industry, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes crucial. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into 139 here.
How does 139’s operating cash flow stack up against its debt?
139’s debt levels surged from HK$50.0M to HK$86.6M over the last 12 months – this includes both the current and long-term debt. With this growth in debt, 139’s cash and short-term investments stands at HK$53.5M , ready to deploy into the business. Moving onto cash from operations, 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 examine some of 139’s operating efficiency ratios such as ROA here.
Can 139 pay its short-term liabilities?
Looking at 139’s most recent HK$22.3M 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 12.18x. However, anything above 3x is considered high and could mean that 139 has too much idle capital in low-earning investments.
Can 139 service its debt comfortably?
With a debt-to-equity ratio of 40.05%, 139 can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if 139’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 139, the ratio of 0.69x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
Next Steps:
139’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. This is only a rough assessment of financial health, and I’m sure 139 has company-specific issues impacting its capital structure decisions. I recommend you continue to research China Soft Power Technology Holdings to get a more holistic view of the stock by looking at: