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Investors are always looking for growth in small-cap stocks like China Technology Solar Power Holdings Limited (HKG:8111), with a market cap of HK$216m. However, an important fact which most ignore is: how financially healthy is the business? Tech companies, in particular ones that run negative earnings, are more likely to be higher risk. So, understanding the company’s financial health becomes 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 suggest you dig deeper yourself into 8111 here.
How much cash does 8111 generate through its operations?
8111’s debt levels have fallen from HK$61m to HK$50m over the last 12 months , which also accounts for long term debt. With this reduction in debt, 8111’s cash and short-term investments stands at HK$18m , ready to deploy into the business. On top of this, 8111 has generated cash from operations of HK$1.5m in the last twelve months, resulting in an operating cash to total debt ratio of 2.9%, signalling that 8111’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making companies since metrics such as return on asset (ROA) requires positive earnings. In 8111’s case, it is able to generate 0.029x cash from its debt capital.
Does 8111’s liquid assets cover its short-term commitments?
Looking at 8111’s HK$52m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.42x. Usually, for Tech companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does 8111 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 69%, 8111 can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since 8111 is currently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Although 8111’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around 8111’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure 8111 has company-specific issues impacting its capital structure decisions. I suggest you continue to research China Technology Solar Power Holdings to get a more holistic view of the small-cap by looking at: