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Investors are always looking for growth in small-cap stocks like G.A. Holdings Limited (HKG:8126), with a market cap of HK$167m. However, an important fact which most ignore is: how financially healthy is the business? Understanding the company’s financial health becomes essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. The following basic checks can help you get a picture of the company’s balance sheet strength. Nevertheless, potential investors would need to take a closer look, and I suggest you dig deeper yourself into 8126 here.
8126’s Debt (And Cash Flows)
8126 has sustained its debt level by about HK$523m over the last 12 months made up of predominantly near term debt. At this stable level of debt, the current cash and short-term investment levels stands at HK$78m , ready to be used for running the business. Moreover, 8126 has produced cash from operations of HK$9.2m over the same time period, resulting in an operating cash to total debt ratio of 1.8%, indicating that 8126’s current level of operating cash is not high enough to cover debt.
Can 8126 meet its short-term obligations with the cash in hand?
At the current liabilities level of HK$933m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.25x. The current ratio is the number you get when you divide current assets by current liabilities. Generally, for Retail Distributors companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Can 8126 service its debt comfortably?
8126 is a relatively highly levered company with a debt-to-equity of 87%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. 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 before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 8126’s case, the ratio of 1.91x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as 8126’s low interest coverage already puts the company at higher risk of default.
8126’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 8126 has company-specific issues impacting its capital structure decisions. I suggest you continue to research G.A. Holdings to get a better picture of the small-cap by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 8126’s future growth? Take a look at our free research report of analyst consensus for 8126’s outlook.
- Historical Performance: What has 8126’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 firstname.lastname@example.org. 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.