While small-cap stocks, such as Hong Kong Shanghai Alliance Holdings Limited (HKG:1001) with its market cap of HK$398m, 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 1001 is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. Nevertheless, these checks don’t give you a full picture, so I suggest you dig deeper yourself into 1001 here.
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1001’s Debt (And Cash Flows)
1001 has sustained its debt level by about HK$1.5b over the last 12 months including long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at HK$207m , ready to be used for running the business. We note it produced negative cash flow over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can take a look at some of 1001’s operating efficiency ratios such as ROA here.
Can 1001 pay its short-term liabilities?
With current liabilities at HK$1.3b, it seems that the business may not have an easy time meeting these commitments with a current assets level of HK$1.2b, leading to a current ratio of 0.95x. The current ratio is the number you get when you divide current assets by current liabilities.
Is 1001’s debt level acceptable?
1001 is a highly-leveraged company with debt exceeding equity by over 100%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. But since 1001 is presently 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:
Although 1001’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. But, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how 1001 has been performing in the past. I suggest you continue to research Hong Kong Shanghai Alliance Holdings to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1001’s future growth? Take a look at our free research report of analyst consensus for 1001’s outlook.
- Historical Performance: What has 1001’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.
- 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.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.