Investors are always looking for growth in small-cap stocks like Hu An Cable Holdings Ltd (SGX:KI3), with a market cap of SGD9.10M. However, an important fact which most ignore is: how financially healthy is the business? Given that KI3 is not presently profitable, it’s crucial to evaluate 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. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into KI3 here.
Does KI3 generate an acceptable amount of cash through operations?
Over the past year, KI3 has reduced its debt from CN¥777.2M to CN¥640.1M , which comprises of short- and long-term debt. With this reduction in debt, KI3’s cash and short-term investments stands at CN¥216.4M for investing into the business. However, 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. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of KI3’s operating efficiency ratios such as ROA here.
Can KI3 meet its short-term obligations with the cash in hand?
With current liabilities at CN¥1,407.3M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of CN¥1,899.9M, with a current ratio of 1.35x. For electrical 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 KI3 face the risk of succumbing to its debt-load?
With total debt exceeding equities, KI3 is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since KI3 is currently 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? KI3’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and 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. In the future, its financial position may be different. I suggest keeping on top of market expectations for KI3’s future growth on our free analysis platform.