In This Article:
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
While small-cap stocks, such as Nanjing Sample Technology Company Limited (HKG:1708) with its market cap of HK$6.0b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, this is not a comprehensive overview, so I’d encourage you to dig deeper yourself into 1708 here.
1708’s Debt (And Cash Flows)
Over the past year, 1708 has ramped up its debt from CN¥424m to CN¥1.3b , which accounts for long term debt. With this rise in debt, 1708's cash and short-term investments stands at CN¥536m to keep the business going. We note it produced negative cash flow over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can assess some of 1708’s operating efficiency ratios such as ROA here.
Can 1708 meet its short-term obligations with the cash in hand?
At the current liabilities level of CN¥2.2b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.65x. The current ratio is calculated by dividing current assets by current liabilities. Generally, for Electronic companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can 1708 service its debt comfortably?
With a debt-to-equity ratio of 62%, 1708 can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. We can check to see whether 1708 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 1708's, case, the ratio of 5.92x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 1708 ample headroom to grow its debt facilities.
Next Steps:
1708’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around 1708's liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for 1708's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Nanjing Sample Technology to get a better picture of the small-cap by looking at: