While small-cap stocks, such as Grand T G Gold Holdings Limited (SEHK:8299) with its market cap of HK$381.68M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that 8299 is not presently profitable, it’s vital to understand the current state of its operations and pathway to profitability. 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 recommend you dig deeper yourself into 8299 here.
How does 8299’s operating cash flow stack up against its debt?
8299 has shrunken its total debt levels in the last twelve months, from HK$544.9M to HK$468.4M , which is made up of current and long term debt. With this debt payback, the current cash and short-term investment levels stands at HK$6.1M for investing into the business. Moreover, 8299 has produced HK$73.6M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 15.71%, signalling that 8299’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires positive earnings. In 8299’s case, it is able to generate 0.16x cash from its debt capital.
Can 8299 meet its short-term obligations with the cash in hand?
At the current liabilities level of HK$221.9M liabilities, it appears that the company is not able to meet these obligations given the level of current assets of HK$142.4M, with a current ratio of 0.64x below the prudent level of 3x.
Can 8299 service its debt comfortably?
With total debt exceeding equities, 8299 is considered a highly levered 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 8299 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? 8299’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. Given that its financial position may be different. I recommend keeping on top of market expectations for 8299’s future growth on our free analysis platform.