In This Article:
China South City Holdings Limited (HKG:1668) is a small-cap stock with a market capitalization of HK$8.6b. 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? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into 1668 here.
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1668’s Debt (And Cash Flows)
1668 has sustained its debt level by about HK$34b over the last 12 months which accounts for long term debt. At this stable level of debt, 1668 currently has HK$5.4b remaining in cash and short-term investments to keep the business going. Moreover, 1668 has generated HK$6.9b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 21%, meaning that 1668’s debt is appropriately covered by operating cash.
Can 1668 pay its short-term liabilities?
With current liabilities at HK$42b, it appears that the company has been able to meet these commitments with a current assets level of HK$47b, leading to a 1.13x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Real Estate companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does 1668 face the risk of succumbing to its debt-load?
1668 is a highly-leveraged company with debt exceeding equity by over 100%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 1668's case, the ratio of 6.76x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 1668 ample headroom to grow its debt facilities.