Investors are always looking for growth in small-cap stocks like World Houseware (Holdings) Limited (HKG:713), with a market cap of HK$428.02m. However, an important fact which most ignore is: how financially healthy is the business? Given that 713 is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, 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$384.00m to HK$308.80m , which is mainly comprised of near term debt. With this reduction in debt, the current cash and short-term investment levels stands at HK$57.37m for investing into the business. Moreover, 713 has produced HK$11.66m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 3.77%, indicating that 713’s current level of operating cash is not high enough to cover 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 positive earnings. In 713’s case, it is able to generate 0.038x cash from its debt capital.
Does 713’s liquid assets cover its short-term commitments?
At the current liabilities level of HK$559.61m liabilities, it seems that the business has been able to meet these commitments with a current assets level of HK$657.76m, leading to a 1.18x current account ratio. For Building companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can 713 service its debt comfortably?713 is a relatively highly levered company with a debt-to-equity of 44.04%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since 713 is currently loss-making, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
713’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure 713 has company-specific issues impacting its capital structure decisions. 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.