VS International Group Limited (HKG:1002) is a small-cap stock with a market capitalization of HK$350.7m. 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? Evaluating financial health as part of your investment thesis is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into 1002 here.
How much cash does 1002 generate through its operations?
1002 has shrunken its total debt levels in the last twelve months, from CN¥320.5m to CN¥255.4m , which is made up of current and long term debt. With this debt repayment, 1002’s cash and short-term investments stands at CN¥107.0m , ready to deploy 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. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of 1002’s operating efficiency ratios such as ROA here.
Does 1002’s liquid assets cover its short-term commitments?
At the current liabilities level of CN¥552.7m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of CN¥560.1m, with a current ratio of 1.01x. Generally, for Machinery companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is 1002’s debt level acceptable?With debt reaching 48.5% of equity, 1002 may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether 1002 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 1002’s, case, the ratio of 3.22x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 1002 ample headroom to grow its debt facilities.
At its current level of cash flow coverage, 1002 has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how 1002 has been performing in the past. I suggest you continue to research V.S. International Group to get a more holistic view of the stock by looking at:
- Valuation: What is 1002 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 1002 is currently mispriced by the market.
- Historical Performance: What has 1002’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.
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