While small-cap stocks, such as Hebei Construction Group Corporation Limited (HKG:1727) with its market cap of HK$7.3b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health 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. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into 1727 here.
How does 1727’s operating cash flow stack up against its debt?
1727’s debt level has been constant at around CN¥3.7b over the previous year – this includes long-term debt. At this constant level of debt, 1727 currently has CN¥4.4b remaining in cash and short-term investments for investing into the business. Additionally, 1727 has produced cash from operations of CN¥497m over the same time period, resulting in an operating cash to total debt ratio of 13%, signalling that 1727’s debt is not appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 1727’s case, it is able to generate 0.13x cash from its debt capital.
Can 1727 meet its short-term obligations with the cash in hand?
With current liabilities at CN¥47b, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.09x. Generally, for Construction companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is 1727’s debt level acceptable?
With a debt-to-equity ratio of 74%, 1727 can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses.
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. This is only a rough assessment of financial health, and I’m sure 1727 has company-specific issues impacting its capital structure decisions. You should continue to research Hebei Construction Group to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1727’s future growth? Take a look at our free research report of analyst consensus for 1727’s outlook.
- 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.
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.