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While small-cap stocks, such as EVA Precision Industrial Holdings Limited (HKG:838) with its market cap of HK$1.3b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes 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, this commentary is still very high-level, so I recommend you dig deeper yourself into 838 here.
How does 838’s operating cash flow stack up against its debt?
Over the past year, 838 has ramped up its debt from HK$1.4b to HK$2.3b – this includes long-term debt. With this rise in debt, 838’s cash and short-term investments stands at HK$1.6b for investing into the business. Additionally, 838 has produced cash from operations of HK$113m in the last twelve months, leading to an operating cash to total debt ratio of 4.9%, indicating that 838’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 838’s case, it is able to generate 0.049x cash from its debt capital.
Can 838 pay its short-term liabilities?
With current liabilities at HK$2.6b, the company has been able to meet these commitments with a current assets level of HK$3.3b, leading to a 1.26x 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.
Is 838’s debt level acceptable?
With a debt-to-equity ratio of 87%, 838 can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In 838’s case, the ratio of 5.6x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 838 ample headroom to grow its debt facilities.
Next Steps:
838’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 838 has company-specific issues impacting its capital structure decisions. You should continue to research EVA Precision Industrial Holdings to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 838’s future growth? Take a look at our free research report of analyst consensus for 838’s outlook.
- Historical Performance: What has 838’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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.