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Investors are always looking for growth in small-cap stocks like World Houseware (Holdings) Limited (HKG:713), with a market cap of HK$310m. However, an important fact which most ignore is: how financially healthy is the business? Since 713 is loss-making right now, it’s crucial to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I recommend you dig deeper yourself into 713 here.
Does 713 produce enough cash relative to debt?
713’s debt levels have fallen from HK$398m to HK$309m over the last 12 months , which is mainly comprised of near term debt. With this debt payback, 713’s cash and short-term investments stands at HK$32m for investing into the business. On top of this, 713 has produced HK$30m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 9.7%, signalling that 713’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making companies since metrics such as return on asset (ROA) requires a positive net income. In 713’s case, it is able to generate 0.097x cash from its debt capital.
Can 713 pay its short-term liabilities?
Looking at 713’s HK$569m in current liabilities, it appears that the company has been able to meet these obligations given the level of current assets of HK$637m, with a current ratio of 1.12x. Usually, for Building companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can 713 service its debt comfortably?
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. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Although 713’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. 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 713 has company-specific issues impacting its capital structure decisions. You should continue to research World Houseware (Holdings) to get a more holistic view of the small-cap 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.
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. On rare occasion, data errors may occur. Thank you for reading.