Is Coslight Technology International Group Limited's (HKG:1043) Balance Sheet A Threat To Its Future?

Coslight Technology International Group Limited (HKG:1043) is a small-cap stock with a market capitalization of HK$915m. 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? Evaluating financial health as part of your investment thesis is 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. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 1043 here.

Does 1043 produce enough cash relative to debt?

1043's debt levels have fallen from CN¥2.4b to CN¥1.2b over the last 12 months , which is mainly comprised of near term debt. With this debt repayment, 1043's cash and short-term investments stands at CN¥300m for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of 1043’s operating efficiency ratios such as ROA here.

Can 1043 meet its short-term obligations with the cash in hand?

With current liabilities at CN¥4.3b, it seems that the business has been able to meet these obligations given the level of current assets of CN¥4.7b, with a current ratio of 1.09x. Usually, for Household Products companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.

Is 1043’s debt level acceptable?

With debt reaching 44% of equity, 1043 may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses.

Next Steps:

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. Keep in mind I haven't considered other factors such as how 1043 has been performing in the past. You should continue to research Coslight Technology International Group to get a more holistic view of the small-cap by looking at:

1. 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.
2. 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.
3. 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 editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.