World Houseware (Holdings) Limited (HKG:713): Time For A Financial Health Check

Investors are always looking for growth in small-cap stocks like World Houseware (Holdings) Limited (SEHK:713), with a market cap of HK$473.26M. 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 assess the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I recommend you dig deeper yourself into 713 here.

Does 713 generate an acceptable amount of cash through operations?

713 has sustained its debt level by about HK$384.00M over the last 12 months made up of predominantly near term debt. At this current level of debt, the current cash and short-term investment levels stands at HK$69.33M , ready to deploy into the business. On top of this, 713 has generated HK$60.02M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 15.63%, signalling that 713’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making businesses since metrics such as return on asset (ROA) requires a positive net income. In 713’s case, it is able to generate 0.16x cash from its debt capital.

Can 713 meet its short-term obligations with the cash in hand?

At the current liabilities level of HK$588.14M liabilities, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.96x, which is below the prudent industry ratio of 3x.
SEHK:713 Historical Debt Feb 27th 18
SEHK:713 Historical Debt Feb 27th 18

Is 713’s debt level acceptable?

With a debt-to-equity ratio of 55.64%, 713 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. But since 713 is presently 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.

Next Steps:

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. Furthermore, its lack of liquidity raises questions over current asset management practices for the small-cap. 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 more holistic view of the stock by looking at: