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While small-cap stocks, such as Hebei Construction Group Corporation Limited (HKG:1727) with its market cap of HK$11b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company’s financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, these checks don’t give you a full picture, so I suggest you dig deeper yourself into 1727 here.
1727’s Debt (And Cash Flows)
1727’s debt level has been constant at around CN¥3.5b over the previous year including long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at CN¥9.1b , ready to be used for running the business. On top of this, 1727 has produced CN¥939m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 27%, signalling that 1727’s current level of operating cash is high enough to cover debt.
Can 1727 meet its short-term obligations with the cash in hand?
Looking at 1727’s CN¥54b 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 1.07x. The current ratio is the number you get when you divide 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.
Can 1727 service its debt comfortably?
With a debt-to-equity ratio of 61%, 1727 can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if 1727’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 1727, the ratio of 21.19x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
1727’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. I admit this is a fairly basic analysis for 1727’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Hebei Construction Group to get a better picture of the small-cap by looking at:
- Valuation: What is 1727 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 1727 is currently mispriced by the market.
- Historical Performance: What has 1727’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.