Gold Tat Group International Limited (SEHK:8266) is a small-cap stock with a market capitalization of HK$342.03M. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Electronic companies, especially ones that are currently loss-making, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into 8266 here.
Does 8266 generate enough cash through operations?
8266 has built up its total debt levels in the last twelve months, from HK$133.4M to HK$148.4M – this includes both the current and long-term debt. With this increase in debt, 8266’s cash and short-term investments stands at HK$30.6M , ready to deploy into the business. Though its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can take a look at some of 8266’s operating efficiency ratios such as ROA here.
Can 8266 pay its short-term liabilities?
At the current liabilities level of HK$219.5M liabilities, it appears that the company has not been able to meet these commitments with a current assets level of HK$208.5M, leading to a 0.95x current account ratio. which is under the appropriate industry ratio of 3x.
Is 8266’s level of debt at an acceptable level?
8266 is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since 8266 is presently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Are you a shareholder? With a high level of debt on its balance sheet, 8266 could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for 8266 to increase its operational efficiency. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Moving forward, its financial position may be different. I recommend keeping on top of market expectations for 8266’s future growth on our free analysis platform.