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Investors are always looking for growth in small-cap stocks like ShiFang Holding Limited (HKG:1831), with a market cap of HK$273m. However, an important fact which most ignore is: how financially healthy is the business? Given that 1831 is not presently profitable, it’s vital to assess the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into 1831 here.
Does 1831 Produce Much Cash Relative To Its Debt?
Over the past year, 1831 has ramped up its debt from CN¥9.1m to CN¥177m , which accounts for long term debt. With this rise in debt, 1831 currently has CN¥45m remaining in cash and short-term investments to keep the business going. We note it produced negative cash flow over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can take a look at some of 1831’s operating efficiency ratios such as ROA here.
Does 1831’s liquid assets cover its short-term commitments?
At the current liabilities level of CN¥69m, the company has been able to meet these commitments with a current assets level of CN¥87m, leading to a 1.26x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Media companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does 1831 face the risk of succumbing to its debt-load?
With debt reaching 94% of equity, 1831 may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. Though, since 1831 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.
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1831’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 1831 has company-specific issues impacting its capital structure decisions. You should continue to research ShiFang Holding to get a more holistic view of the small-cap by looking at: