Investors are always looking for growth in small-cap stocks like World Houseware (Holdings) Limited (HKG:713), with a market cap of HK$260m. However, an important fact which most ignore is: how financially healthy is the business? Since 713 is loss-making right now, it’s essential to understand the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into 713 here.
How does 713’s operating cash flow stack up against its debt?
Over the past year, 713 has reduced its debt from HK$398m to HK$309m made up of predominantly near term debt. With this reduction in debt, 713’s cash and short-term investments stands at HK$32m for investing into the business. Moreover, 713 has generated cash from operations of HK$30m in the last twelve months, resulting in an operating cash to total debt ratio of 9.7%, meaning that 713’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In 713’s case, it is able to generate 0.097x cash from its debt capital.
Can 713 meet its short-term obligations with the cash in hand?
With current liabilities at HK$569m, it appears that the company has been able to meet these commitments with a current assets level of HK$637m, leading to a 1.12x current account ratio. Usually, for Building companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is 713’s debt level acceptable?
713 is a relatively highly levered company with a debt-to-equity of 48%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since 713 is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
At its current level of cash flow coverage, 713 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. I admit this is a fairly basic analysis for 713’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research World Houseware (Holdings) to get a better picture of the stock by looking at:
- Historical Performance: What has 713’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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