China Ludao Technology Company Limited (HKG:2023) is a small-cap stock with a market capitalization of HK$630m. 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 vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into 2023 here.
Does 2023 produce enough cash relative to debt?
2023’s debt levels surged from CN¥8.5m to CN¥256m over the last 12 months , which includes long-term debt. With this growth in debt, 2023’s cash and short-term investments stands at CN¥168m , ready to deploy into the business. On top of this, 2023 has generated CN¥109k in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 0.04%, meaning that 2023’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 2023’s case, it is able to generate 0.00043x cash from its debt capital.
Can 2023 meet its short-term obligations with the cash in hand?
At the current liabilities level of CN¥211m, it seems that the business has been able to meet these obligations given the level of current assets of CN¥454m, with a current ratio of 2.15x. Usually, for Household Products companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can 2023 service its debt comfortably?
With debt reaching 66% of equity, 2023 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. We can check to see whether 2023 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 2023’s, case, the ratio of 3.71x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as 2023’s high interest coverage is seen as responsible and safe practice.
2023’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 2023’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for 2023’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research China Ludao Technology to get a more holistic view of the small-cap by looking at:
- 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.
- 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.
- 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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