What does Bonjour Holdings Limited’s (HKG:653) Balance Sheet Tell Us About Its Future?
While small-cap stocks, such as Bonjour Holdings Limited (SEHK:653) with its market cap of HK$989.64M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Specialty Retail businesses operating in the environment facing headwinds from current disruption, in particular ones that run negative earnings, tend to be high risk. Evaluating financial health as part of your investment thesis is vital. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into 653 here.
Does 653 generate enough cash through operations?
653’s debt level has been constant at around HK$517.56M over the previous year comprising of short- and long-term debt. At this constant level of debt, 653 currently has HK$250.08M remaining in cash and short-term investments for investing into the business. Additionally, 653 has generated HK$34.72M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 6.71%, meaning that 653’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires a positive net income. In 653’s case, it is able to generate 0.067x cash from its debt capital.
Can 653 pay its short-term liabilities?
With current liabilities at HK$425.57M, it seems that the business has been able to meet these commitments with a current assets level of HK$549.69M, leading to a 1.29x current account ratio. For Specialty Retail companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Is 653’s debt level acceptable?
With debt reaching 80.72% of equity, 653 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. But since 653 is currently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
At its current level of cash flow coverage, 653 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. Keep in mind I haven’t considered other factors such as how 653 has been performing in the past. You should continue to research Bonjour Holdings to get a more holistic view of the stock by looking at:
Valuation: What is 653 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 653 is currently mispriced by the market.
Historical Performance: What has 653’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.
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 pass 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.
