While small-cap stocks, such as Hospital Corporation of China Limited (HKG:3869) with its market cap of CN¥2.49b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Healthcare companies, in particular ones that run negative earnings, tend to be high risk. Assessing first and foremost the financial health is vital. Here are few basic financial health checks you should consider before taking the plunge. However, I know these factors are very high-level, so I suggest you dig deeper yourself into 3869 here.
How does 3869’s operating cash flow stack up against its debt?
3869 has increased its debt level by about CN¥238.46m over the last 12 months – this includes both the current and long-term debt. With this ramp up in debt, the current cash and short-term investment levels stands at CN¥278.18m for investing into the business. Moreover, 3869 has produced CN¥47.07m in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 19.74%, meaning that 3869’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies since metrics such as return on asset (ROA) requires a positive net income. In 3869’s case, it is able to generate 0.2x cash from its debt capital.
Can 3869 pay its short-term liabilities?
At the current liabilities level of CN¥149.83m 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 2.7x. Generally, for Healthcare companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is 3869’s debt level acceptable?3869’s level of debt is appropriate relative to its total equity, at 15.27%. 3869 is not taking on too much debt commitment, which may be constraining for future growth. 3869’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
3869’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for 3869’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Hospital of China to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 3869’s future growth? Take a look at our free research report of analyst consensus for 3869’s outlook.
- Valuation: What is 3869 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 3869 is currently mispriced by the market.
- 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.