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Investors are always looking for growth in small-cap stocks like Coslight Technology International Group Limited (HKG:1043), with a market cap of HK$641m. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let’s work through some financial health checks you may wish to consider if you’re interested in this stock. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into 1043 here.
1043’s Debt (And Cash Flows)
1043 has shrunk its total debt levels in the last twelve months, from CN¥2.7b to CN¥1.9b , which is mainly comprised of near term debt. With this debt repayment, 1043 currently has CN¥284m remaining in cash and short-term investments to keep the business going. Moreover, 1043 has produced CN¥210m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 11%, signalling that 1043’s current level of operating cash is not high enough to cover debt.
Does 1043’s liquid assets cover its short-term commitments?
With current liabilities at CN¥4.5b, the company has been able to meet these obligations given the level of current assets of CN¥4.5b, with a current ratio of 1.01x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Household Products companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is 1043’s debt level acceptable?
1043 is a relatively highly levered company with a debt-to-equity of 78%. 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 1043’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 1043, the ratio of 1.83x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as 1043’s low interest coverage already puts the company at higher risk of default.
Although 1043’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. Since there is also no concerns around 1043’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure 1043 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Coslight Technology International Group to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1043’s future growth? Take a look at our free research report of analyst consensus for 1043’s outlook.
- Historical Performance: What has 1043’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 firstname.lastname@example.org. 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.