Investors are always looking for growth in small-cap stocks like Synertone Communication Corporation (SEHK:1613), with a market cap of HK$304.74M. However, an important fact which most ignore is: how financially healthy is the business? Communications companies, in particular ones that run negative earnings, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I recommend you dig deeper yourself into 1613 here.
How does 1613’s operating cash flow stack up against its debt?
1613’s debt level has been constant at around HK$571.31M over the previous year – this includes both the current and long-term debt. At this current level of debt, 1613 currently has HK$32.38M remaining in cash and short-term investments , 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 1613’s operating efficiency ratios such as ROA here.
Does 1613’s liquid assets cover its short-term commitments?
Looking at 1613’s most recent HK$381.45M liabilities, it appears that the company is not able to meet these obligations given the level of current assets of HK$336.50M, with a current ratio of 0.88x below the prudent level of 3x.
Is 1613’s debt level acceptable?1613 is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since 1613 is presently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
With a high level of debt on its balance sheet, 1613 could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for 1613 to increase its operational efficiency. In addition to this, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure 1613 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Synertone Communication to get a more holistic view of the stock by looking at:
- 1. Valuation: What is 1613 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 1613 is currently mispriced by the market.
- 2. Historical Performance: What has 1613’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.
- 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.