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Investors are always looking for growth in small-cap stocks like Ka Shui International Holdings Limited (HKG:822), with a market cap of HK$375m. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 822 here.
How does 822’s operating cash flow stack up against its debt?
822 has shrunken its total debt levels in the last twelve months, from HK$491m to HK$398m – this includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at HK$172m , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of 822’s operating efficiency ratios such as ROA here.
Can 822 pay its short-term liabilities?
With current liabilities at HK$704m, the company has been able to meet these commitments with a current assets level of HK$920m, leading to a 1.31x current account ratio. Usually, for Machinery 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.
Does 822 face the risk of succumbing to its debt-load?
822 is a relatively highly levered company with a debt-to-equity of 46%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if 822’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 822, the ratio of 2.75x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.
822’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. 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 822 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Ka Shui International Holdings to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 822’s future growth? Take a look at our free research report of analyst consensus for 822’s outlook.
- Historical Performance: What has 822’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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at email@example.com. 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. Thank you for reading.