Investors are always looking for growth in small-cap stocks like Chuan Holdings Limited (HKG:1420), with a market cap of HK$388.7m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is vital, 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. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into 1420 here.
How does 1420’s operating cash flow stack up against its debt?
Over the past year, 1420 has ramped up its debt from S$11.6m to S$17.0m – this includes both the current and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at S$50.2m for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, 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 examine some of 1420’s operating efficiency ratios such as ROA here.
Can 1420 pay its short-term liabilities?
With current liabilities at S$27.0m, the company has been able to meet these commitments with a current assets level of S$94.6m, leading to a 3.51x current account ratio. Though, a ratio greater than 3x may be considered as too high, as 1420 could be holding too much capital in a low-return investment environment.
Can 1420 service its debt comfortably?
With debt at 18.3% of equity, 1420 may be thought of as appropriately levered. This range is considered safe as 1420 is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether 1420 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 1420’s, case, the ratio of 16.55x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
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1420’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for 1420’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Chuan Holdings to get a better picture of the stock by looking at: