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While small-cap stocks, such as Orange Sky Golden Harvest Entertainment (Holdings) Limited (HKG:1132) with its market cap of HK$727.9m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. 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 suggest you dig deeper yourself into 1132 here.
Does 1132 produce enough cash relative to debt?
1132’s debt levels surged from HK$914.9m to HK$1.42b over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, 1132’s cash and short-term investments stands at HK$1.51b for investing into the business. Additionally, 1132 has generated cash from operations of HK$240.7m in the last twelve months, resulting in an operating cash to total debt ratio of 16.9%, signalling that 1132’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 1132’s case, it is able to generate 0.17x cash from its debt capital.
Can 1132 meet its short-term obligations with the cash in hand?
Looking at 1132’s most recent HK$668.3m liabilities, it appears that the company has been able to meet these commitments with a current assets level of HK$1.64b, leading to a 2.46x current account ratio. For Media companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is 1132’s debt level acceptable?
1132 is a relatively highly levered company with a debt-to-equity of 65.3%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses.
Next Steps:
At its current level of cash flow coverage, 1132 has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for 1132’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Orange Sky Golden Harvest Entertainment (Holdings) to get a more holistic view of the stock by looking at: