Milestone Builder Holdings Limited (HKG:1667) is a small-cap stock with a market capitalization of HK$176m. 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? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into 1667 here.
How does 1667’s operating cash flow stack up against its debt?
Over the past year, 1667 has ramped up its debt from HK$54m to HK$108m . With this growth in debt, 1667 currently has HK$6.3m remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can examine some of 1667’s operating efficiency ratios such as ROA here.
Does 1667’s liquid assets cover its short-term commitments?
At the current liabilities level of 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. Generally, for Construction companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can 1667 service its debt comfortably?
With a debt-to-equity ratio of 88%, 1667 can be considered as an above-average leveraged company. 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 1667 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 1667’s, case, 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. Since there is also no concerns around 1667’s liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven’t considered other factors such as how 1667 has been performing in the past. I suggest you 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.
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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