Jia Meng Holdings Limited (SEHK:8101) is a small-cap stock with a market capitalization of HK$216.90M. 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? Companies operating in the consumer durables industry facing headwinds from current disruption, in particular ones that run negative earnings, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into 8101 here.
How does 8101’s operating cash flow stack up against its debt?
8101 has built up its total debt levels in the last twelve months, from HK$36.0M to HK$42.8M – this includes both the current and long-term debt. With this rise in debt, 8101’s cash and short-term investments stands at HK$185.3M 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 take a look at some of 8101’s operating efficiency ratios such as ROA here.
Can 8101 meet its short-term obligations with the cash in hand?
With current liabilities at HK$79.8M liabilities, it appears that the company has been able to meet these commitments with a current assets level of HK$282.7M, leading to a 3.54x current account ratio. Though, anything about 3x may be excessive, since 8101 may be leaving too much capital in low-earning investments.
Is 8101’s level of debt at an acceptable level?
With debt reaching 77.11% of equity, 8101 may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since 8101 is currently loss-making, sustainability of its current state of operations becomes a concern. 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? At its current level of cash flow coverage, 8101 has room for improvement to better cushion for events which may require debt repayment. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Given that 8101’s financial situation may change. I suggest keeping abreast of market expectations for 8101’s future growth on our free analysis platform.