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Superactive Group Company Limited (HKG:176) is a small-cap stock with a market capitalization of HK$650m. 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? Companies operating in the Consumer Durables industry facing headwinds from current disruption, even ones that are profitable, are inclined towards being higher risk. So, understanding the company’s financial health becomes crucial. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 176 here.
How much cash does 176 generate through its operations?
176 has increased its debt level by about HK$429m over the last 12 months including long-term debt. With this ramp up in debt, 176 currently has HK$63m remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of 176’s operating efficiency ratios such as ROA here.
Can 176 pay its short-term liabilities?
With current liabilities at HK$217m, it seems that the business has been able to meet these commitments with a current assets level of HK$1.0b, leading to a 4.78x current account ratio. However, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Can 176 service its debt comfortably?
With debt reaching 47% of equity, 176 may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible.
Next Steps:
Although 176’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. Since there is also no concerns around 176’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 176 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Superactive Group to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 176’s future growth? Take a look at our free research report of analyst consensus for 176’s outlook.
- Historical Performance: What has 176’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 editorial-team@simplywallst.com.