Investors are always looking for growth in small-cap stocks like Skyworth Digital Holdings Limited (HKG:751), with a market cap of HK$9.12b. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Consumer Durables industry 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. However, I know these factors are very high-level, so I recommend you dig deeper yourself into 751 here.
Does 751 produce enough cash relative to debt?
751 has built up its total debt levels in the last twelve months, from HK$8.55b to HK$12.10b – this includes both the current and long-term debt. With this growth in debt, 751 currently has HK$9.35b remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of 751’s operating efficiency ratios such as ROA here.
Can 751 pay its short-term liabilities?
Looking at 751’s most recent HK$27.72b liabilities, it seems that the business has been able to meet these obligations given the level of current assets of HK$39.85b, with a current ratio of 1.44x. For Consumer Durables companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can 751 service its debt comfortably?
With debt reaching 58.63% of equity, 751 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. We can check to see whether 751 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 751's, case, the ratio of 14.75x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.Next Steps:
At its current level of cash flow coverage, 751 has room for improvement to better cushion for events which may require debt repayment. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I'm sure 751 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Skyworth Digital Holdings to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 751’s future growth? Take a look at our free research report of analyst consensus for 751’s outlook.
- Valuation: What is 751 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 751 is currently mispriced by the market.
- 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.
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Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.