Investors are always looking for growth in small-cap stocks like Weiqiao Textile Company Limited (HKG:2698), with a market cap of HK$3.1b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into 2698 here.
How does 2698’s operating cash flow stack up against its debt?
2698 has shrunken its total debt levels in the last twelve months, from CN¥9.7b to CN¥7.0b , which includes long-term debt. With this reduction in debt, 2698 currently has CN¥13b remaining in cash and short-term investments for investing into the business. On top of this, 2698 has produced cash from operations of CN¥2.8b during the same period of time, leading to an operating cash to total debt ratio of 40%, meaning that 2698’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 2698’s case, it is able to generate 0.4x cash from its debt capital.
Can 2698 pay its short-term liabilities?
Looking at 2698’s CN¥9.2b in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.79x. Usually, for Luxury companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is 2698’s debt level acceptable?
2698’s level of debt is appropriate relative to its total equity, at 39%. This range is considered safe as 2698 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether 2698 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 2698’s, case, the ratio of 2.98x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Next Steps:
2698’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how 2698 has been performing in the past. You should continue to research Weiqiao Textile to get a better picture of the stock by looking at: