Is China Ludao Technology Company Limited's (HKG:2023) Balance Sheet A Threat To Its Future?
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While small-cap stocks, such as China Ludao Technology Company Limited (HKG:2023) with its market cap of HK$507m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into 2023 here.
2023’s Debt (And Cash Flows)
2023 has built up its total debt levels in the last twelve months, from CN¥141m to CN¥259m , which accounts for long term debt. With this rise in debt, 2023's cash and short-term investments stands at CN¥179m , ready to be used for running the business. Moving on, operating cash flow was negative over the last twelve months. For this article’s sake, I won’t be looking at this today, but you can take a look at some of 2023’s operating efficiency ratios such as ROA here.
Does 2023’s liquid assets cover its short-term commitments?
With current liabilities at CN¥258m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.79x. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Household Products companies, this is a suitable ratio as there's enough of a cash buffer without holding too much capital in low return investments.
Is 2023’s debt level acceptable?
With debt reaching 67% of equity, 2023 may be thought of as relatively highly levered. 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 check to see whether 2023 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 2023's, case, the ratio of 2.25x 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.
Next Steps:
Although 2023’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I'm sure 2023 has company-specific issues impacting its capital structure decisions. You should continue to research China Ludao Technology to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for 2023’s future growth? Take a look at our free research report of analyst consensus for 2023’s outlook.
Historical Performance: What has 2023'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.
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