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Investors are always looking for growth in small-cap stocks like Da Ming International Holdings Limited (HKG:1090), with a market cap of HK$2.5b. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes crucial, 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. However, this commentary is still very high-level, so I suggest you dig deeper yourself into 1090 here.
How much cash does 1090 generate through its operations?
1090 has built up its total debt levels in the last twelve months, from CN¥2.4b to CN¥3.6b – this includes long-term debt. With this increase in debt, 1090’s cash and short-term investments stands at CN¥506m for investing into the business. Moreover, 1090 has produced cash from operations of CN¥746m over the same time period, resulting in an operating cash to total debt ratio of 21%, indicating that 1090’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 1090’s case, it is able to generate 0.21x cash from its debt capital.
Can 1090 pay its short-term liabilities?
Looking at 1090’s CN¥6.1b in current liabilities, it appears that the company may not have an easy time meeting these commitments with a current assets level of CN¥6.0b, leading to a current ratio of 0.99x.
Can 1090 service its debt comfortably?
Since total debt levels have outpaced equities, 1090 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. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In 1090’s case, the ratio of 3.67x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as 1090’s high interest coverage is seen as responsible and safe practice.
Next Steps:
1090’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. However, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how 1090 has been performing in the past. I recommend you continue to research Da Ming International Holdings to get a better picture of the stock by looking at: