How Financially Strong Is Emperor Culture Group Limited (HKG:491)?

Emperor Culture Group Limited (SEHK:491) is a small-cap stock with a market capitalization of HK$578.40M. 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? Since 491 is loss-making right now, it’s crucial 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. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into 491 here.

Does 491 generate enough cash through operations?

Over the past year, 491 has ramped up its debt from HK$37.78M to HK$60.92M made up of predominantly near term debt. With this rise in debt, 491 currently has HK$525.50M remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of 491’s operating efficiency ratios such as ROA here.

Can 491 pay its short-term liabilities?

With current liabilities at HK$172.81M, it appears that the company has been able to meet these commitments with a current assets level of HK$860.11M, leading to a 4.98x current account ratio. Though, anything about 3x may be excessive, since 491 may be leaving too much capital in low-earning investments.

SEHK:491 Historical Debt May 25th 18

Is 491’s debt level acceptable?

With a debt-to-equity ratio of 12.94%, 491’s debt level may be seen as prudent. 491 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is very low with 491, and the company has plenty of headroom and ability to raise debt should it need to in the future.

Next Steps:

Although 491’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company will 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 491 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Emperor Culture Group to get a more holistic view of the stock by looking at:

1. Historical Performance: What has 491’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.