Investors are always looking for growth in small-cap stocks like China Sandi Holdings Limited (SEHK:910), with a market cap of HK$1.64B. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, since poor capital management may bring about 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. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into 910 here.
Does 910 generate an acceptable amount of cash through operations?
Over the past year, 910 has ramped up its debt from HK$743.0M to HK$805.1M , which is made up of current and long term debt. With this growth in debt, 910 currently has HK$332.1M remaining in cash and short-term investments for investing into the business. Moreover, 910 has produced HK$31.8M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 0.04x, indicating that 910’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 910’s case, it is able to generate 0.04x cash from its debt capital.
Can 910 meet its short-term obligations with the cash in hand?
Looking at 910’s most recent HK$124.1M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 5.23x. However, anything about 3x may be excessive, since 910 may be leaving too much capital in low-earning investments.
Is 910’s level of debt at an acceptable level?
With a debt-to-equity ratio of 36.38%, 910’s debt level may be seen as prudent. This range is considered safe as 910 is not taking on too much debt obligation, which may be constraining for future growth. We can test if 910’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 910, the ratio of 7.41x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 910 ample headroom to grow its debt facilities.
Next Steps:
Are you a shareholder? 910’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Given that its financial position may be different. You should always be researching market expectations for 910’s future growth on our free analysis platform.