Investors are always looking for growth in small-cap stocks like Trinity Limited (SEHK:891), with a market cap of HK$1.21B. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the specialty retail industry facing headwinds from current disruption, in particular ones that run negative earnings, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into 891 here.
Does 891 generate enough cash through operations?
Over the past year, 891 has ramped up its debt from HK$726.3M to HK$1,304.3M – this includes both the current and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at HK$580.6M for investing into the business. However, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of 891’s operating efficiency ratios such as ROA here.
Can 891 pay its short-term liabilities?
At the current liabilities level of HK$1,107.5M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of HK$1,272.7M, with a current ratio of 1.15x. For specialty retail companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can 891 service its debt comfortably?
With debt reaching 57.96% of equity, 891 may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since 891 is presently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Are you a shareholder? 891’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. Given that its financial position may change. I recommend keeping on top of market expectations for 891’s future growth on our free analysis platform.