While small-cap stocks, such as Good Friend International Holdings Inc (HKG:2398) with its market cap of CN¥693.50m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about 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, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into 2398 here.
Does 2398 produce enough cash relative to debt?
2398’s debt level has been constant at around CN¥367.43m over the previous year . At this current level of debt, 2398’s cash and short-term investments stands at CN¥174.21m for investing into the business. Moreover, 2398 has generated cash from operations of CN¥101.90m in the last twelve months, leading to an operating cash to total debt ratio of 27.73%, meaning that 2398’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 2398’s case, it is able to generate 0.28x cash from its debt capital.
Can 2398 meet its short-term obligations with the cash in hand?
At the current liabilities level of CN¥1.08b liabilities, the company has been able to meet these commitments with a current assets level of CN¥1.27b, leading to a 1.17x current account ratio. For Machinery companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Can 2398 service its debt comfortably?With debt reaching 44.41% of equity, 2398 may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In 2398’s case, the ratio of 11.35x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as 2398’s high interest coverage is seen as responsible and safe practice.
Although 2398’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. 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 2398’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Good Friend International Holdings to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 2398’s future growth? Take a look at our free research report of analyst consensus for 2398’s outlook.
- Historical Performance: What has 2398’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.