While small-cap stocks, such as China U-Ton Holdings Limited (SEHK:6168) with its market cap of HK$1.91B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since 6168 is loss-making right now, it’s vital to understand the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I suggest you dig deeper yourself into 6168 here.
Does 6168 generate enough cash through operations?
Over the past year, 6168 has ramped up its debt from CN¥334.9M to CN¥656.3M – this includes both the current and long-term debt. With this rise in debt, 6168 currently has CN¥128.1M remaining in cash and short-term investments , ready to deploy into the business. However, 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. For this article’s sake, I won’t be looking at this today, but you can take a look at some of 6168’s operating efficiency ratios such as ROA here.
Does 6168’s liquid assets cover its short-term commitments?
At the current liabilities level of CN¥579.0M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of CN¥1,229.6M, with a current ratio of 2.12x. Usually, for construction companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does 6168 face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, 6168 is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since 6168 is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Are you a shareholder? 6168’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, its high liquidity means the company should continue to operate smoothly in the case of adverse events. Given that its financial position may change. You should always be keeping abreast of market expectations for 6168’s future growth on our free analysis platform.