While small-cap stocks, such as Da Ming International Holdings Limited (HKG:1090) with its market cap of HK$2.2b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is essential, 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 recommend you dig deeper yourself into 1090 here.
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1090’s Debt (And Cash Flows)
1090’s debt levels surged from CN¥3.4b to CN¥4.1b over the last 12 months , which includes long-term debt. With this rise in debt, 1090’s cash and short-term investments stands at CN¥177m to keep the business going. Moreover, 1090 has generated CN¥401m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 9.8%, meaning that 1090’s debt is not covered by operating cash.
Does 1090’s liquid assets cover its short-term commitments?
At the current liabilities level of CN¥6.3b, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.85x. The current ratio is the number you get when you divide current assets by current liabilities.
Can 1090 service its debt comfortably?
With total debt exceeding equity, 1090 is considered a highly levered company. 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 1090’s case, the ratio of 2.48x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as 1090’s low interest coverage already puts the company at higher risk of default.
Next Steps:
1090’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. However, its lack of liquidity raises questions over current asset management practices for the small-cap. Keep in mind I haven’t considered other factors such as how 1090 has been performing in the past. I recommend you continue to research Da Ming International Holdings to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1090’s future growth? Take a look at our free research report of analyst consensus for 1090’s outlook.
- Historical Performance: What has 1090’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.
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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.