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Investors are always looking for growth in small-cap stocks like Jiyi Household International Holdings Limited (HKG:1495), with a market cap of HK$594m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is crucial, 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, this commentary is still very high-level, so I suggest you dig deeper yourself into 1495 here.
Does 1495 produce enough cash relative to debt?
Over the past year, 1495 has ramped up its debt from CN¥94m to CN¥107m made up of predominantly near term debt. With this rise in debt, 1495’s cash and short-term investments stands at CN¥63m , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, 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 assess some of 1495’s operating efficiency ratios such as ROA here.
Can 1495 pay its short-term liabilities?
Looking at 1495’s CN¥204m in current liabilities, the company has been able to meet these obligations given the level of current assets of CN¥471m, with a current ratio of 2.31x. Usually, for Trade Distributors companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does 1495 face the risk of succumbing to its debt-load?
With debt at 31% of equity, 1495 may be thought of as appropriately levered. This range is considered safe as 1495 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if 1495’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 1495, the ratio of 3.99x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as 1495’s high interest coverage is seen as responsible and safe practice.
1495 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how 1495 has been performing in the past. I suggest you continue to research Jiyi Household International Holdings to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1495’s future growth? Take a look at our free research report of analyst consensus for 1495’s outlook.
- Historical Performance: What has 1495’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.
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 email@example.com.