Investors are always looking for growth in small-cap stocks like Beijing Urban Construction Design & Development Group Co., Limited (HKG:1599), with a market cap of HK$3.2b. 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. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. However, these checks don’t give you a full picture, so I suggest you dig deeper yourself into 1599 here.
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Does 1599 Produce Much Cash Relative To Its Debt?
1599’s debt levels surged from CN¥3.3b to CN¥4.6b over the last 12 months , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at CN¥3.9b , ready to be used for running the business. Moving on, operating cash flow was negative over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of 1599’s operating efficiency ratios such as ROA here.
Can 1599 meet its short-term obligations with the cash in hand?
Looking at 1599’s CN¥7.3b in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.45x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Construction companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Is 1599’s debt level acceptable?
Since total debt levels exceed equity, 1599 is a highly leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses.
1599’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure 1599 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Beijing Urban Construction Design & Development Group to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1599’s future growth? Take a look at our free research report of analyst consensus for 1599’s outlook.
- Historical Performance: What has 1599’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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