While small-cap stocks, such as Yield Go Holdings Ltd. (HKG:1796) with its market cap of HK$494m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is essential, 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. However, potential investors would need to take a closer look, and I recommend you dig deeper yourself into 1796 here.
Does 1796 Produce Much Cash Relative To Its Debt?
Over the past year, 1796 has ramped up its debt from HK$31m to HK$35m . With this rise in debt, 1796’s cash and short-term investments stands at HK$27m , ready to be used for running the business. Moreover, 1796 has generated HK$5.5m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 16%, signalling that 1796’s current level of operating cash is not high enough to cover debt.
Does 1796’s liquid assets cover its short-term commitments?
With current liabilities at HK$92m, it seems that the business has been able to meet these obligations given the level of current assets of HK$160m, with a current ratio of 1.75x. 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 as there’s enough of a cash buffer without holding too much capital in low return investments.
Does 1796 face the risk of succumbing to its debt-load?
1796 is a relatively highly levered company with a debt-to-equity of 51%. 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 1796’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 1796, the ratio of 31.58x suggests that interest is comfortably covered, which means that lenders may be willing to lend out more funding as 1796’s high interest coverage is seen as responsible and safe practice.
Next Steps:
1796’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 1796’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 1796 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Yield Go Holdings to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 1796’s future growth? Take a look at our free research report of analyst consensus for 1796’s outlook.
- Valuation: What is 1796 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 1796 is currently mispriced by the market.
- 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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