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New Silkroad Culturaltainment Limited (HKG:472) is a small-cap stock with a market capitalization of HK$2.7b. 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? Given that 472 is not presently profitable, it’s essential to evaluate the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into 472 here.
Does 472 produce enough cash relative to debt?
472’s debt levels surged from HK$203m to HK$1.1b over the last 12 months , which includes long-term debt. With this increase in debt, 472’s cash and short-term investments stands at HK$197m , 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. For this article’s sake, I won’t be looking at this today, but you can take a look at some of 472’s operating efficiency ratios such as ROA here.
Can 472 pay its short-term liabilities?
Looking at 472’s HK$565m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of HK$2.6b, leading to a 4.63x current account ratio. Having said that, a ratio above 3x may be considered excessive by some investors.
Can 472 service its debt comfortably?
With debt reaching 45% of equity, 472 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. Though, since 472 is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Although 472’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. Since there is also no concerns around 472’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure 472 has company-specific issues impacting its capital structure decisions. You should continue to research New Silkroad Culturaltainment to get a more holistic view of the small-cap by looking at: