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While small-cap stocks, such as FIH Mobile Limited (HKG:2038) with its market cap of HK$7.3b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Electronic 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. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into 2038 here.
How does 2038’s operating cash flow stack up against its debt?
2038’s debt levels surged from US$346m to US$1.2b 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 US$2.4b for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of 2038’s operating efficiency ratios such as ROA here.
Can 2038 meet its short-term obligations with the cash in hand?
Looking at 2038’s US$5.7b in current liabilities, the company has been able to meet these obligations given the level of current assets of US$6.8b, with a current ratio of 1.21x. Generally, for Electronic 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.
Is 2038’s debt level acceptable?
With a debt-to-equity ratio of 45%, 2038 can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since 2038 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.
2038’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for 2038’s financial health. Other important fundamentals need to be considered alongside. You should continue to research FIH Mobile to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 2038’s future growth? Take a look at our free research report of analyst consensus for 2038’s outlook.
- Historical Performance: What has 2038’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 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 email@example.com.