Peking University Resources (Holdings) Company Limited (SEHK:618) is a small-cap stock with a market capitalization of HK$1.60B. 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 electronic industry, especially ones that are currently loss-making, tend to be high risk. So, understanding the company’s financial health becomes essential. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into 618 here.
Does 618 generate enough cash through operations?
Over the past year, 618 has ramped up its debt from HK$22,621.5M to HK$25,165.8M , which is made up of current and long term debt. With this increase in debt, 618’s cash and short-term investments stands at HK$2,714.7M for investing into the business. However, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can examine some of 618’s operating efficiency ratios such as ROA here.
Does 618’s liquid assets cover its short-term commitments?
At the current liabilities level of HK$32,228.6M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of HK$48,587.9M, with a current ratio of 1.51x. Usually, for electronic companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is 618’s level of debt at an acceptable level?
With total debt exceeding equities, 618 is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since 618 is presently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Are you a shareholder? 618’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Though, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. Given that 618’s financial situation may change. I suggest keeping on top of market expectations for 618’s future growth on our free analysis platform.