While small-cap stocks, such as i-CABLE Communications Limited (SEHK:1097) with its market cap of HK$1.43B, 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 1097 is not presently profitable, it’s essential to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 1097 here.

Does 1097 generate an acceptable amount of cash through operations?

1097 has built up its total debt levels in the last twelve months, from HK$300.0M to HK$590.0M , which is mainly comprised of near term debt. With this rise in debt, 1097’s cash and short-term investments stands at HK$120.7M for investing into the business. Additionally, 1097 has generated HK$84.2M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 14.27%, signalling that 1097’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires positive earnings. In 1097’s case, it is able to generate 0.14x cash from its debt capital.

Can 1097 pay its short-term liabilities?

With current liabilities at HK$1,102.2M, it appears that the company is not able to meet these obligations given the level of current assets of HK$210.4M, with a current ratio of 0.19x below the prudent level of 3x.

Can 1097 service its debt comfortably?

Since total debt levels have outpaced equities, 1097 is a highly 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 1097 is presently 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:

1097’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure 1097 has company-specific issues impacting its capital structure decisions. I suggest you continue to research i-CABLE Communications to get a more holistic view of the stock by looking at:

1. Historical Performance: What has 1097’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.

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.