While small-cap stocks, such as Dining Concepts Holdings Limited ( SEHK:8056 ) with its market cap of HK$180.69M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that 8056 is not presently profitable, it's crucial to understand the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into 8056 here .
Does 8056 generate enough cash through operations?
8056 has increased its debt level by about HK$15.0M over the last 12 months – this includes both the current and long-term debt. With this growth in debt, 8056 currently has HK$52.5M remaining in cash and short-term investments for investing into the business. Moreover, 8056 has generated HK$24.4M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 162.33%, indicating that 8056's operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In 8056's case, it is able to generate 1.62x cash from its debt capital.
Does 8056's liquid assets cover its short-term commitments?
At the current liabilities level of HK$64.7M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.13x. Usually, for Hospitality companies, this is a suitable ratio as there's enough of a cash buffer without holding too capital in low return investments.
Can 8056 service its debt comfortably?
8056's level of debt is appropriate relative to its total equity, at 10.67%. This range is considered safe as 8056 is not taking on too much debt obligation, which may be constraining for future growth. Risk around debt is very low for 8056, and the company also has the ability and headroom to increase debt if needed going forward.
Next Steps:
8056's high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. I admit this is a fairly basic analysis for 8056's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Dining Concepts Holdings to get a more holistic view of the stock by looking at:
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1. Historical Performance: What has 8056'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.
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2. 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.
