【can you smoke weed with a concussion】Is TC Orient Lighting Holdings Limited’s (HKG:515) Balance Sheet A Threat To Its Future?

Investors are always looking for growth in small-cap stocks like TC Orient Lighting Holdings Limited (

HKG:515

),can you smoke weed with a concussion with a market cap of HK$140m. However, an important fact which most ignore is: how financially healthy is the business? Electronic companies, in particular ones that run negative earnings, tend to be high risk. Evaluating financial health as part of your investment thesis is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I’d encourage you to

dig deeper yourself into 515 here

.

How does 515’s operating cash flow stack up against its debt?

515’s debt levels have fallen from HK$231m to HK$186m over the last 12 months made up of predominantly near term debt. With this debt payback, the current cash and short-term investment levels stands at HK$25m for investing into the business. On top of this, 515 has produced HK$14m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 7.4%, signalling that 515’s current level of operating cash is not high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies since metrics such as return on asset (ROA) requires a positive net income. In 515’s case, it is able to generate 0.074x cash from its debt capital.

Can 515 meet its short-term obligations with the cash in hand?

Looking at 515’s HK$662m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of HK$711m, leading to a 1.07x current account ratio. Usually, for Electronic companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

SEHK:515 Historical Debt January 2nd 19

Is 515’s debt level acceptable?

515 is a relatively highly levered company with a debt-to-equity of 72%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since 515 is presently loss-making, 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:

515’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. Since there is also no concerns around 515’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure 515 has company-specific issues impacting its capital structure decisions. I recommend you continue to research TC Orient Lighting Holdings to get a better picture of the small-cap by looking at:

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Historical Performance

: What has 515’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 protected]

.

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