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While small-cap stocks, such as Road King Infrastructure Limited (HKG:1098) with its market cap of HK$12b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into 1098 here.
1098’s Debt (And Cash Flows)
Over the past year, 1098 has maintained its debt levels at around HK$22b – this includes long-term debt. At this current level of debt, 1098 currently has HK$12b remaining in cash and short-term investments , ready to be used for running the business. Additionally, 1098 has produced cash from operations of HK$6.9b over the same time period, leading to an operating cash to total debt ratio of 31%, meaning that 1098’s operating cash is sufficient to cover its debt.
Can 1098 pay its short-term liabilities?
At the current liabilities level of HK$43b, it appears that the company has been able to meet these commitments with a current assets level of HK$54b, leading to a 1.26x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. For Real Estate companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does 1098 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 88%, 1098 can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies.
Next Steps:
1098’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. 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 1098 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Road King Infrastructure to get a better picture of the small-cap by looking at: