Huifu Payment Limited (HKG:1806) is a small-cap stock with a market capitalization of HK$4.56b. 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? Companies operating in the IT industry, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into 1806 here.
Does 1806 produce enough cash relative to debt?
1806’s debt levels have fallen from CN¥766.3m to CN¥415.3m over the last 12 months – this includes both the current and long-term debt. With this debt payback, the current cash and short-term investment levels stands at CN¥393.5m , ready to deploy into the business. Additionally, 1806 has generated cash from operations of CN¥775.5m in the last twelve months, leading to an operating cash to total debt ratio of 187%, indicating that 1806’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 1806’s case, it is able to generate 1.87x cash from its debt capital.
Can 1806 pay its short-term liabilities?
With current liabilities at CN¥7.38b, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.98x, which is below the prudent industry ratio of 3x.
Is 1806’s debt level acceptable?1806 is a relatively highly levered company with a debt-to-equity of 58.8%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses.
Although 1806’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. 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 stock by looking at:
- 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.
- 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.
- 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.