Is Atlinks Group Limited's (HKG:8043) Balance Sheet A Threat To Its Future?

Atlinks Group Limited (SEHK:8043) is a small-cap stock with a market capitalization of HK$158.00M. 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? Communications companies, especially ones that are currently loss-making, tend to be high 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 suggest you dig deeper yourself into 8043 here.

Does 8043 generate an acceptable amount of cash through operations?

8043's debt levels surged from €8.67M to €9.16M over the last 12 months made up of predominantly near term debt. With this increase in debt, the current cash and short-term investment levels stands at €4.92M , 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 assess some of 8043’s operating efficiency ratios such as ROA here.

Does 8043’s liquid assets cover its short-term commitments?

At the current liabilities level of €18.97M liabilities, the company has been able to meet these commitments with a current assets level of €23.62M, leading to a 1.25x current account ratio. Generally, for Communications companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Does 8043 face the risk of succumbing to its debt-load?

Since total debt levels have outpaced equities, 8043 is a highly leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since 8043 is currently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.

Next Steps:

At its current level of cash flow coverage, 8043 has room for improvement to better cushion for events which may require debt repayment. Though, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I'm sure 8043 has company-specific issues impacting its capital structure decisions. You should continue to research Atlinks Group to get a more holistic view of the stock by looking at:

• 1. Valuation: What is 8043 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 8043 is currently mispriced by the market.
• 2. Historical Performance: What has 8043'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.

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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.