Good Friend International Holdings Inc (HKG:2398) is a small-cap stock with a market capitalization of HK$685m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? So, understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I recommend you dig deeper yourself into 2398 here.
Does 2398 produce enough cash relative to debt?
Over the past year, 2398 has ramped up its debt from CN¥349m to CN¥472m . With this rise in debt, 2398’s cash and short-term investments stands at CN¥184m , ready to deploy into the business. Moreover, 2398 has produced CN¥76m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 16%, indicating that 2398’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 2398’s case, it is able to generate 0.16x cash from its debt capital.
Does 2398’s liquid assets cover its short-term commitments?
Looking at 2398’s CN¥1.2b in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of CN¥1.4b, leading to a 1.12x current account ratio. For Machinery 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 2398’s debt level acceptable?
2398 is a relatively highly levered company with a debt-to-equity of 59%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether 2398 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 2398’s, case, the ratio of 8.18x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 2398 ample headroom to grow its debt facilities.
2398’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 2398’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 2398 has been performing in the past. 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.
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.
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