While small-cap stocks, such as Green International Holdings Limited (SEHK:2700) with its market cap of HK$333.34M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since 2700 is loss-making right now, 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 suggest you dig deeper yourself into 2700 here.
How does 2700’s operating cash flow stack up against its debt?
Over the past year, 2700 has ramped up its debt from HK$59.9M to HK$135.2M , which is made up of current and long term debt. With this growth in debt, 2700 currently has HK$24.5M remaining in cash and short-term investments , ready to deploy into the business. Though 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 2700’s operating efficiency ratios such as ROA here.
Can 2700 meet its short-term obligations with the cash in hand?
At the current liabilities level of HK$100.8M liabilities, it appears that the company has been able to meet these commitments with a current assets level of HK$248.9M, leading to a 2.47x current account ratio. Usually, for leisure companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is 2700’s level of debt at an acceptable level?
Since total debt levels have outpaced equities, 2700 is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since 2700 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.
Next Steps:
Are you a shareholder? 2700’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. Though, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. Given that its financial position may be different. You should always be keeping on top of market expectations for 2700’s future growth on our free analysis platform.