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Beijing Jingkelong Company Limited (HKG:814) is a small-cap stock with a market capitalization of HK$598m. 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? Assessing first and foremost the financial health is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company's balance sheet strength. However, these checks don't give you a full picture, so I recommend you dig deeper yourself into 814 here.
814’s Debt (And Cash Flows)
814 has shrunk its total debt levels in the last twelve months, from CN¥3.5b to CN¥2.4b . With this debt repayment, the current cash and short-term investment levels stands at CN¥822m to keep the business going. On top of this, 814 has produced cash from operations of CN¥224m during the same period of time, leading to an operating cash to total debt ratio of 9.2%, signalling that 814’s debt is not covered by operating cash.
Can 814 pay its short-term liabilities?
Looking at 814’s CN¥5.0b in current liabilities, the company has been able to meet these commitments with a current assets level of CN¥5.0b, leading to a 1x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Consumer Retailing companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Does 814 face the risk of succumbing to its debt-load?
Since total debt levels exceed equity, 814 is a highly leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if 814’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 814, the ratio of 1.9x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
Although 814’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around 814's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how 814 has been performing in the past. I recommend you continue to research Beijing Jingkelong to get a more holistic view of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 814’s future growth? Take a look at our free research report of analyst consensus for 814’s outlook.
- Historical Performance: What has 814'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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.