Investors are always looking for growth in small-cap stocks like Riverine China Holdings Limited (SEHK:1417), with a market cap of HK$160.02M. However, an important fact which most ignore is: how financially healthy is the business? So, understanding the company’s financial health becomes vital, 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, I know these factors are very high-level, so I recommend you dig deeper yourself into 1417 here.
How does 1417’s operating cash flow stack up against its debt?
Over the past year, 1417 has ramped up its debt from CN¥16.0M to CN¥50.0M made up of predominantly near term debt. With this growth in debt, the current cash and short-term investment levels stands at CN¥84.1M for investing into the business. On top of this, 1417 has produced CN¥21.5M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 0.43x, indicating that 1417’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 1417’s case, it is able to generate 0.43x cash from its debt capital.
Does 1417’s liquid assets cover its short-term commitments?
Looking at 1417’s most recent CN¥198.6M liabilities, the company has been able to meet these obligations given the level of current assets of CN¥205.9M, with a current ratio of 1.04x. For commercial services 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.
Can 1417 service its debt comfortably?
With a debt-to-equity ratio of 45.78%, 1417 can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In 1417’s case, the ratio of 22.56x suggests that interest is excessively covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
Are you a shareholder? 1417’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 1417’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may be different. I suggest keeping abreast of market expectations for 1417’s future growth on our free analysis platform.