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While small-cap stocks, such as China Technology Solar Power Holdings Limited (SEHK:8111) with its market cap of HK$117.26M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Tech industry, in particular ones that run negative earnings, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is essential. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I suggest you dig deeper yourself into 8111 here.
Does 8111 generate an acceptable amount of cash through operations?
Over the past year, 8111 has maintained its debt levels at around HK$57.17M comprising of short- and long-term debt. At this current level of debt, 8111 currently has HK$36.88M remaining in cash and short-term investments , ready to deploy into the business. On top of this, 8111 has produced HK$17.29M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 30.25%, signalling that 8111’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies since metrics such as return on asset (ROA) requires positive earnings. In 8111’s case, it is able to generate 0.3x cash from its debt capital.
Can 8111 meet its short-term obligations with the cash in hand?
With current liabilities at HK$83.98M, it seems that the business has been able to meet these obligations given the level of current assets of HK$141.39M, with a current ratio of 1.68x. For Tech companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does 8111 face the risk of succumbing to its debt-load?
With debt reaching 88.87% of equity, 8111 may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since 8111 is presently unprofitable, 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. I admit this is a fairly basic analysis for 8111’s financial health. Other important fundamentals need to be considered alongside. You should continue to research China Technology Solar Power Holdings to get a better picture of the small-cap by looking at: