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Investors are always looking for growth in small-cap stocks like Oriental Payment Group Holdings Limited (HKG:8613), with a market cap of HK$206m. However, an important fact which most ignore is: how financially healthy is the business? IT companies, especially ones that are currently loss-making, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into 8613 here.
Does 8613 produce enough cash relative to debt?
8613’s debt levels have fallen from HK$7.6m to HK$5.1m over the last 12 months , which also accounts for long term debt. With this reduction in debt, 8613 currently has HK$20m remaining in cash and short-term investments for investing into the business. Additionally, 8613 has produced cash from operations of HK$7.8m in the last twelve months, leading to an operating cash to total debt ratio of 152%, meaning that 8613’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In 8613’s case, it is able to generate 1.52x cash from its debt capital.
Does 8613’s liquid assets cover its short-term commitments?
Looking at 8613’s HK$48m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.41x. For IT companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can 8613 service its debt comfortably?
8613’s level of debt is appropriate relative to its total equity, at 17%. 8613 is not taking on too much debt commitment, which may be constraining for future growth. 8613’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
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8613’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure 8613 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Oriental Payment Group Holdings to get a more holistic view of the stock by looking at: