Coslight Technology International Group Limited (HKG:1043) is a small-cap stock with a market capitalization of HK$1.0b. 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? Assessing first and foremost the financial health is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into 1043 here.
How does 1043’s operating cash flow stack up against its debt?
Over the past year, 1043 has reduced its debt from CN¥2.4b to CN¥1.2b made up of predominantly near term debt. With this reduction in debt, 1043 currently has CN¥300m remaining in cash and short-term investments , ready to deploy 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 assess some of 1043’s operating efficiency ratios such as ROA here.
Does 1043’s liquid assets cover its short-term commitments?
With current liabilities at CN¥4.3b, it seems that the business has been able to meet these commitments with a current assets level of CN¥4.7b, leading to a 1.09x current account ratio. For Household Products companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is 1043’s debt level acceptable?
With debt reaching 44% of equity, 1043 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.
Next Steps:
Although 1043’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure 1043 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Coslight Technology International Group to get a more holistic view of the small-cap by looking at: