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China Touyun Tech Group Limited (HKG:1332) is a small-cap stock with a market capitalization of HK$1.1b. 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? Given that 1332 is not presently profitable, it’s crucial to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into 1332 here.
How does 1332’s operating cash flow stack up against its debt?
In the previous 12 months, 1332’s rose by about HK$314m including long-term debt. With this increase in debt, 1332 currently has HK$267m remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, 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 examine some of 1332’s operating efficiency ratios such as ROA here.
Does 1332’s liquid assets cover its short-term commitments?
With current liabilities at HK$97m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 4.42x. However, many consider a ratio above 3x to be high.
Does 1332 face the risk of succumbing to its debt-load?
1332’s level of debt is appropriate relative to its total equity, at 35%. 1332 is not taking on too much debt commitment, which may be constraining for future growth. Investors’ risk associated with debt is very low with 1332, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
1332 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for 1332’s financial health. Other important fundamentals need to be considered alongside. You should continue to research China Touyun Tech Group to get a better picture of the stock by looking at:
- Historical Performance: What has 1332’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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