Celebrate International Holdings Limited (SEHK:8212) is a small-cap stock with a market capitalization of HK$269.92M. 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? Consumer Retailing businesses operating in the environment facing headwinds from current disruption, in particular ones that run negative earnings, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into 8212 here.
How does 8212’s operating cash flow stack up against its debt?
8212’s debt levels surged from HK$0.4M to HK$20.8M over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, 8212 currently has HK$251.6M remaining in cash and short-term investments for investing into the business. However, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, 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 8212’s operating efficiency ratios such as ROA here.
Can 8212 pay its short-term liabilities?
With current liabilities at HK$9.1M liabilities, it appears that the company has been able to meet these commitments with a current assets level of HK$322.4M, leading to a 35.58x current account ratio. However, anything about 3x may be excessive, since 8212 may be leaving too much capital in low-earning investments.
Is 8212’s level of debt at an acceptable level?
8212’s level of debt is low relative to its total equity, at 4.79%. This range is considered safe as 8212 is not taking on too much debt obligation, which may be constraining for future growth. Risk around debt is extremely low for 8212, and the company also has the ability and headroom to increase debt if needed going forward.
Next Steps:
Are you a shareholder? 8212’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 exhibits an ability to meet its near term obligations should an adverse event occur. Given that its financial position may change. You should always be researching market expectations for 8212’s future growth on our free analysis platform.