Want to participate in a short research study? Help shape the future of investing tools and receive a $20 prize!
While small-cap stocks, such as BGMC International Limited (HKG:1693) with its market cap of HK$365m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, this commentary is still very high-level, so I suggest you dig deeper yourself into 1693 here.
How does 1693’s operating cash flow stack up against its debt?
1693’s debt level has been constant at around RM296m over the previous year – this includes long-term debt. At this stable level of debt, the current cash and short-term investment levels stands at RM104m for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of 1693’s operating efficiency ratios such as ROA here.
Can 1693 meet its short-term obligations with the cash in hand?
Looking at 1693’s RM336m 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 1.64x. For Construction companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is 1693’s debt level acceptable?
With debt reaching 88% of equity, 1693 may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if 1693’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 1693, the ratio of 0.7x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.
1693’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. Since there is also no concerns around 1693’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how 1693 has been performing in the past. I recommend you continue to research BGMC International to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1693’s future growth? Take a look at our free research report of analyst consensus for 1693’s outlook.
- Historical Performance: What has 1693’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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.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.