What You Must Know About Merdeka Financial Services Group Limited's (HKG:8163) Financial Strength

Merdeka Financial Services Group Limited (SEHK:8163) is a small-cap stock with a market capitalization of HK$171.37M. 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? Companies operating in the Consumer Retailing industry facing headwinds from current disruption, in particular ones that run negative earnings, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into 8163 here.

Does 8163 generate an acceptable amount of cash through operations?

8163's debt levels surged from HK$1.00B to HK$1.86B over the last 12 months , which is made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at HK$117.29M for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn't be too useful, 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 8163’s operating efficiency ratios such as ROA here.

Can 8163 meet its short-term obligations with the cash in hand?

Looking at 8163’s most recent HK$246.36M liabilities, it seems that the business has not been able to meet these commitments with a current assets level of HK$176.17M, leading to a 0.72x current account ratio. which is under the appropriate industry ratio of 3x.

Does 8163 face the risk of succumbing to its debt-load?

With total debt exceeding equities, 8163 is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since 8163 is presently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

8163’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I'm sure 8163 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Merdeka Financial Services Group to get a more holistic view of the stock by looking at:

• 1. Valuation: What is 8163 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 8163 is currently mispriced by the market.
• 2. Historical Performance: What has 8163'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.
• 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.

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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.