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While small-cap stocks, such as Unisplendour Technology (Holdings) Limited (HKG:365) with its market cap of HK$3.14b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is 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. Nevertheless, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into 365 here.
How does 365’s operating cash flow stack up against its debt?
Over the past year, 365 has reduced its debt from HK$879.77m to HK$107.97m , which is made up of current and long term debt. With this debt repayment, 365’s cash and short-term investments stands at HK$490.57m , ready to deploy into the business. Moreover, 365 has produced cash from operations of HK$71.56m in the last twelve months, leading to an operating cash to total debt ratio of 66.27%, meaning that 365’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 365’s case, it is able to generate 0.66x cash from its debt capital.
Can 365 pay its short-term liabilities?
Looking at 365’s most recent HK$174.69m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of HK$615.73m, with a current ratio of 3.52x. However, anything above 3x is considered high and could mean that 365 has too much idle capital in low-earning investments.
Can 365 service its debt comfortably?
With a debt-to-equity ratio of 23.34%, 365’s debt level may be seen as prudent. This range is considered safe as 365 is not taking on too much debt obligation, which may be constraining for future growth.
Next Steps:
365’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure 365 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Unisplendour Technology (Holdings) to get a better picture of the stock by looking at:
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Valuation: What is 365 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 365 is currently mispriced by the market.
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Historical Performance: What has 365’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.