Is China Ludao Technology Company Limited’s (HKG:2023) Balance Sheet A Threat To Its Future?

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China Ludao Technology Company Limited (HKG:2023) is a small-cap stock with a market capitalization of HK$570m. 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? Understanding the company’s financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company’s balance sheet strength. However, this is just a partial view of the stock, and I recommend you dig deeper yourself into 2023 here.

2023’s Debt (And Cash Flows)

2023’s debt levels surged from CN¥141m to CN¥259m over the last 12 months – this includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at CN¥179m , ready to be used for running the business. Moving on, operating cash flow was negative over the last twelve months. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of 2023’s operating efficiency ratios such as ROA here.

Can 2023 meet its short-term obligations with the cash in hand?

With current liabilities at CN¥258m, it appears that the company has been able to meet these commitments with a current assets level of CN¥462m, leading to a 1.79x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. 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.

SEHK:2023 Historical Debt, June 11th 2019
SEHK:2023 Historical Debt, June 11th 2019

Does 2023 face the risk of succumbing to its debt-load?

2023 is a relatively highly levered company with a debt-to-equity of 67%. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 2023’s case, the ratio of 2.25x suggests that interest is not strongly covered, which means that debtors may be less inclined to loan the company more money, reducing its headroom for growth through debt.

Next Steps:

Although 2023’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. Keep in mind I haven’t considered other factors such as how 2023 has been performing in the past. You should continue to research China Ludao Technology to get a better picture of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for 2023’s future growth? Take a look at our free research report of analyst consensus for 2023’s outlook.
  2. Historical Performance: What has 2023’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.

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 editorial-team@simplywallst.com. 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.