Is Huifu Payment Limited’s (HKG:1806) Balance Sheet Strong Enough To Weather A Storm?

Investors are always looking for growth in small-cap stocks like Huifu Payment Limited (HKG:1806), with a market cap of HK$3.7b. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the IT industry, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. I believe these basic checks tell most of the story you need to know. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into 1806 here.

How much cash does 1806 generate through its operations?

Over the past year, 1806 has ramped up its debt from CN¥766m to CN¥921m , which accounts for long term debt. With this increase in debt, 1806’s cash and short-term investments stands at CN¥2.2b for investing into the business. Additionally, 1806 has generated cash from operations of CN¥496m during the same period of time, leading to an operating cash to total debt ratio of 54%, signalling that 1806’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 1806’s case, it is able to generate 0.54x cash from its debt capital.

Can 1806 pay its short-term liabilities?

With current liabilities at CN¥12b, the company has been able to meet these commitments with a current assets level of CN¥12b, leading to a 1.07x current account ratio. Generally, for IT companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

SEHK:1806 Historical Debt January 22nd 19
SEHK:1806 Historical Debt January 22nd 19

Is 1806’s debt level acceptable?

1806 is a relatively highly levered company with a debt-to-equity of 50%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible.

Next Steps:

1806’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 1806’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how 1806 has been performing in the past. You should continue to research Huifu Payment to get a better picture of the small-cap by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for 1806’s future growth? Take a look at our free research report of analyst consensus for 1806’s outlook.
  2. Valuation: What is 1806 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 1806 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.