While small-cap stocks, such as Interactive Entertainment China Cultural Technology Investments Limited (SEHK:8081) with its market cap of HK$165.42M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Healthcare companies, in particular ones that run negative earnings, are inclined towards being higher risk. So, understanding the company’s financial health becomes vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I suggest you dig deeper yourself into 8081 here.
Does 8081 generate enough cash through operations?
8081 has sustained its debt level by about HK$299.6M over the last 12 months – this includes both the current and long-term debt. At this current level of debt, 8081 currently has HK$535.7M remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of 8081’s operating efficiency ratios such as ROA here.
Can 8081 pay its short-term liabilities?
With current liabilities at HK$289.2M, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.61x. For Healthcare companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Is 8081’s debt level acceptable?
With debt reaching 44.52% of equity, 8081 may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since 8081 is currently loss-making, there’s a question of sustainability of its current operations. 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:
8081’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure 8081 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Interactive Entertainment China Cultural Technology Investments to get a better picture of the stock by looking at: