Is Ozner Water International Holding Limited's (HKG:2014) Balance Sheet A Threat To Its Future?

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Ozner Water International Holding Limited (HKG:2014) is a small-cap stock with a market capitalization of HK$3.4b. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Consumer Durables businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, tend to be high risk. So, understanding the company's financial health becomes essential. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into 2014 here.

How much cash does 2014 generate through its operations?

Over the past year, 2014 has ramped up its debt from CN¥1.0b to CN¥1.9b , which accounts for long term debt. With this rise in debt, 2014 currently has CN¥644m remaining in cash and short-term investments for investing into the business. On top of this, 2014 has produced CN¥274m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 15%, meaning that 2014’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 2014’s case, it is able to generate 0.15x cash from its debt capital.

Can 2014 meet its short-term obligations with the cash in hand?

At the current liabilities level of CN¥1.9b, it seems that the business has been able to meet these obligations given the level of current assets of CN¥2.4b, with a current ratio of 1.23x. Usually, for Consumer Durables companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Does 2014 face the risk of succumbing to its debt-load?

With debt reaching 58% of equity, 2014 may be thought of as relatively highly levered. 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 2014's case, the ratio of 3.01x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 2014 ample headroom to grow its debt facilities.

Next Steps:

Although 2014’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for 2014's financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Ozner Water International Holding to get a better picture of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 2014’s future growth? Take a look at our free research report of analyst consensus for 2014’s outlook.
2. Valuation: What is 2014 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 2014 is currently mispriced by the market.
3. 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 editorial-team@simplywallst.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.