Is China Electronics Optics Valley Union Holding Company Limited's (HKG:798) Balance Sheet Strong Enough To Weather A Storm?

China Electronics Optics Valley Union Holding Company Limited (HKG:798) is a small-cap stock with a market capitalization of HK$3.73b. 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? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about 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. Though, this commentary is still very high-level, so I suggest you dig deeper yourself into 798 here.

How does 798’s operating cash flow stack up against its debt?

798 has built up its total debt levels in the last twelve months, from CN¥3.27b to CN¥5.00b – this includes both the current and long-term debt. With this rise in debt, 798's cash and short-term investments stands at CN¥2.01b , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of 798’s operating efficiency ratios such as ROA here.

Can 798 pay its short-term liabilities?

With current liabilities at CN¥4.75b, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.97x. Usually, for Real Estate 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.

Does 798 face the risk of succumbing to its debt-load?

With debt reaching 76.4% of equity, 798 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 test if 798’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 798, the ratio of 5.28x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 798 ample headroom to grow its debt facilities.

Next Steps:

At its current level of cash flow coverage, 798 has room for improvement to better cushion for events which may require debt repayment. However, 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 798's financial health. Other important fundamentals need to be considered alongside. You should continue to research China Electronics Optics Valley Union Holding to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 798’s future growth? Take a look at our free research report of analyst consensus for 798’s outlook.
2. Valuation: What is 798 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 798 is currently mispriced by the market.
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.

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 editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.