While small-cap stocks, such as Milestone Builder Holdings Limited (HKG:1667) with its market cap of HK$240m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We’ll look at some basic checks that can form a snapshot the company’s financial strength. Nevertheless, potential investors would need to take a closer look, and I’d encourage you to dig deeper yourself into 1667 here.
Does 1667 Produce Much Cash Relative To Its Debt?
1667 has built up its total debt levels in the last twelve months, from HK$54m to HK$108m . With this growth in debt, the current cash and short-term investment levels stands at HK$6.3m to keep the business going. Its negative operating cash flow means calculating cash-to-debt wouldn’t be useful. 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 1667’s operating efficiency ratios such as ROA here.
Can 1667 meet its short-term obligations with the cash in hand?
With current liabilities at HK$269m, it seems that the business has been able to meet these commitments with a current assets level of HK$375m, leading to a 1.39x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. For Construction companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does 1667 face the risk of succumbing to its debt-load?
With debt reaching 88% of equity, 1667 may be thought of as relatively highly levered. 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 1667’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 1667, the ratio of 5.79x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
1667’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure 1667 has company-specific issues impacting its capital structure decisions. You should continue to research Milestone Builder Holdings to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1667’s future growth? Take a look at our free research report of analyst consensus for 1667’s outlook.
- Historical Performance: What has 1667’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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