Investors are always looking for growth in small-cap stocks like Grand Ming Group Holdings Limited (HKG:1271), with a market cap of HK$3.5b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, since poor capital management may bring about 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. Nevertheless, these checks don’t give you a full picture, so I recommend you dig deeper yourself into 1271 here.
Does 1271 Produce Much Cash Relative To Its Debt?
Over the past year, 1271 has ramped up its debt from HK$3.1b to HK$3.9b , which includes long-term debt. With this growth in debt, 1271’s cash and short-term investments stands at HK$109m , 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 examine some of 1271’s operating efficiency ratios such as ROA here.
Can 1271 meet its short-term obligations with the cash in hand?
At the current liabilities level of HK$553m, it appears that the company has been able to meet these obligations given the level of current assets of HK$2.5b, with a current ratio of 4.51x. The current ratio is calculated by dividing current assets by current liabilities. Having said that, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Can 1271 service its debt comfortably?
1271 is a highly-leveraged company with debt exceeding equity by over 100%. 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 test if 1271’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 1271, the ratio of 10.85x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving 1271 ample headroom to grow its debt facilities.
1271’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 1271’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for 1271’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Grand Ming Group Holdings to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1271’s future growth? Take a look at our free research report of analyst consensus for 1271’s outlook.
- Historical Performance: What has 1271’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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