While small-cap stocks, such as U Banquet Group Holding Limited (SEHK:1483) with its market cap of HK$1.14B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since 1483 is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I recommend you dig deeper yourself into 1483 here.
How does 1483’s operating cash flow stack up against its debt?
Over the past year, 1483 has ramped up its debt from HK$25.0M to HK$328.0M . With this growth in debt, the current cash and short-term investment levels stands at HK$298.6M , ready to deploy into the business. However, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of 1483’s operating efficiency ratios such as ROA here.
Does 1483’s liquid assets cover its short-term commitments?
At the current liabilities level of HK$393.5M liabilities, the company is not able to meet these obligations given the level of current assets of HK$334.7M, with a current ratio of 0.85x below the prudent level of 3x.
Does 1483 face the risk of succumbing to its debt-load?
Since total debt levels have outpaced equities, 1483 is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since 1483 is currently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Are you a shareholder? 1483’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. Though its low liquidity raises concerns over whether short term obligations can be met in time, and raising further debt to meet these expenses could be challenging. Going forward, its financial position may change. I recommend keeping on top of market expectations for 1483’s future growth on our free analysis platform.
Are you a potential investor? 1483’s high debt level shouldn’t scare off investors just yet. Its operating cash flow seems adequate to meet obligations which means its debt is being put to good use. Though, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. In order to build your conviction in the stock, you need to also examine 1483’s track record. You should continue your analysis by taking a look at 1483’s past performance analysis on our free platform to figure out 1483’s financial health position.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.