While small-cap stocks, such as Media Chinese International Limited (HKG:685) with its market cap of HK$860.5m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that 685 is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 685 here.
Does 685 produce enough cash relative to debt?
685 has built up its total debt levels in the last twelve months, from US$53.4m to US$68.4m , which comprises of short- and long-term debt. With this rise in debt, 685’s cash and short-term investments stands at US$128.3m , ready to deploy into the business. Moreover, 685 has produced US$22.0m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 32.1%, meaning that 685’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies since metrics such as return on asset (ROA) requires a positive net income. In 685’s case, it is able to generate 0.32x cash from its debt capital.
Can 685 meet its short-term obligations with the cash in hand?
At the current liabilities level of US$121.1m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.53x. Usually, for Media companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can 685 service its debt comfortably?685’s level of debt is appropriate relative to its total equity, at 33.9%. This range is considered safe as 685 is not taking on too much debt obligation, which may be constraining for future growth. Investors’ risk associated with debt is very low with 685, and the company has plenty of headroom and ability to raise debt should it need to in the future.
685 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure 685 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Media Chinese International to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 685’s future growth? Take a look at our free research report of analyst consensus for 685’s outlook.
- Valuation: What is 685 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 685 is currently mispriced by the market.
- 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 firstname.lastname@example.org.