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Investors are always looking for growth in small-cap stocks like Time2u International Holding Limited (SEHK:1327), with a market cap of HK$158.98M. However, an important fact which most ignore is: how financially healthy is the business? Since 1327 is loss-making right now, it’s essential to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into 1327 here.
Does 1327 generate an acceptable amount of cash through operations?
1327’s debt levels have fallen from CN¥31.00M to CN¥21.79M over the last 12 months , which is mainly comprised of near term debt. With this debt repayment, 1327 currently has CN¥206.18M remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, 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. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of 1327’s operating efficiency ratios such as ROA here.
Can 1327 meet its short-term obligations with the cash in hand?
Looking at 1327’s most recent CN¥33.12M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 16.53x. Though, anything about 3x may be excessive, since 1327 may be leaving too much capital in low-earning investments.
Is 1327’s debt level acceptable?
1327’s level of debt is low relative to its total equity, at 3.94%. 1327 is not taking on too much debt commitment, which may be constraining for future growth. Risk around debt is extremely low for 1327, and the company also has the ability and headroom to increase debt if needed going forward.
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1327’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure 1327 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Time2u International Holding to get a better picture of the stock by looking at: