China Creative Global Holdings Limited (SEHK:1678) is a small-cap stock with a market capitalization of HK$411.84M. 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 consumer durables industry facing headwinds from current disruption, in particular ones that run negative earnings, tend to be high risk. Assessing first and foremost the financial health is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into 1678 here.
Does 1678 generate enough cash through operations?
1678 has built up its total debt levels in the last twelve months, from CN¥49.0M to CN¥176.1M , which comprises of short- and long-term debt. With this rise in debt, 1678’s cash and short-term investments stands at CN¥820.3M , ready to deploy into the business. Moreover, 1678 has generated cash from operations of CN¥216.5M in the last twelve months, resulting in an operating cash to total debt ratio of 1.23x, meaning that 1678’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In 1678’s case, it is able to generate 1.23x cash from its debt capital.
Does 1678’s liquid assets cover its short-term commitments?
Looking at 1678’s most recent CN¥78.1M liabilities, it seems that the business has been able to meet these commitments with a current assets level of CN¥999.3M, leading to a 12.8x current account ratio. Though, anything above 3x is considered high and could mean that 1678 has too much idle capital in low-earning investments.
Does 1678 face the risk of succumbing to its debt-load?
1678’s level of debt is low relative to its total equity, at 8.04%. 1678 is not taking on too much debt commitment, which may be constraining for future growth. Risk around debt is extremely low for 1678, and the company also has the ability and headroom to increase debt if needed going forward.
Next Steps:
Are you a shareholder? 1678’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Going forward, 1678’s financial situation may change. I suggest researching market expectations for 1678’s future growth on our free analysis platform.