Co-Prosperity Holdings Limited (SEHK:707) is a small-cap stock with a market capitalization of HK$2.61B. 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? Evaluating financial health as part of your investment thesis is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. 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 suggest you dig deeper yourself into 707 here.
Does 707 generate enough cash through operations?
707’s debt levels surged from CN¥185.8M to CN¥238.6M over the last 12 months – this includes both the current and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at CN¥227.9M , ready to deploy into the business. However, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, 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 707’s operating efficiency ratios such as ROA here.
Can 707 pay its short-term liabilities?
Looking at 707’s most recent CN¥481.5M liabilities, it seems that the business has been able to meet these commitments with a current assets level of CN¥685.5M, leading to a 1.42x current account ratio. For luxury companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Does 707 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 50.73%, 707 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.
Next Steps:
Are you a shareholder? At its current level of cash flow coverage, 707 has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that 707’s financial situation may change. I recommend researching market expectations for 707’s future growth on our free analysis platform.
Are you a potential investor? Although near-term liquidity isn’t an issue, 707’s large debt ratio along with poor cash coverage may not be what you’re after in an investment. Though, keep in mind that this is a point-in-time analysis, and today’s performance may not be representative of 707’s track record. I encourage you to continue your research by taking a look at 707’s past performance analysis on our free platform to conclude on 707’s financial health.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.