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CITIC Dameng Holdings Limited (HKG:1091) is a small-cap stock with a market capitalization of HK$1.5b. 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? Understanding the company's financial health becomes crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into 1091 here.
1091’s Debt (And Cash Flows)
1091 has built up its total debt levels in the last twelve months, from HK$3.7b to HK$4.4b , which includes long-term debt. With this growth in debt, 1091 currently has HK$1.6b remaining in cash and short-term investments , ready to be used for running the business. On top of this, 1091 has produced cash from operations of HK$450m over the same time period, leading to an operating cash to total debt ratio of 10%, meaning that 1091’s operating cash is less than its debt.
Does 1091’s liquid assets cover its short-term commitments?
At the current liabilities level of HK$5.0b, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.93x. The current ratio is calculated by dividing current assets by current liabilities.
Is 1091’s debt level acceptable?
Since total debt levels exceed equity, 1091 is a highly leveraged company. 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 1091's case, the ratio of 1.39x 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:
1091’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I'm sure 1091 has company-specific issues impacting its capital structure decisions. I suggest you continue to research CITIC Dameng Holdings to get a better picture of the stock by looking at: