World Houseware (Holdings) Limited (HKG:713): Time For A Financial Health Check
Simply Wall St
February 27, 2018
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.
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.
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: