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While small-cap stocks, such as CITIC Resources Holdings Limited (HKG:1205) with its market cap of HK$4.9b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, 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. However, I know these factors are very high-level, so I suggest you dig deeper yourself into 1205 here.
How does 1205’s operating cash flow stack up against its debt?
1205’s debt levels have fallen from HK$7.5b to HK$6.8b over the last 12 months , which includes long-term debt. With this reduction in debt, 1205 currently has HK$1.7b remaining in cash and short-term investments for investing into the business. Moreover, 1205 has produced cash from operations of HK$801m during the same period of time, leading to an operating cash to total debt ratio of 12%, indicating that 1205’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 1205’s case, it is able to generate 0.12x cash from its debt capital.
Does 1205’s liquid assets cover its short-term commitments?
Looking at 1205’s HK$1.1b in current liabilities, the company has been able to meet these obligations given the level of current assets of HK$4.3b, with a current ratio of 4.06x. However, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Can 1205 service its debt comfortably?
Since total debt levels have outpaced equities, 1205 is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible.
Next Steps:
1205’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. Since there is also no concerns around 1205’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how 1205 has been performing in the past. I suggest you continue to research CITIC Resources Holdings to get a better picture of the small-cap by looking at:
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Future Outlook: What are well-informed industry analysts predicting for 1205’s future growth? Take a look at our free research report of analyst consensus for 1205’s outlook.
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Valuation: What is 1205 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 1205 is currently mispriced by the market.
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Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.