While small-cap stocks, such as Ever Smart International Holdings Limited (SEHK:8187) with its market cap of HK$1.00B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since 8187 is loss-making right now, it’s vital to understand the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 8187 here.
How does 8187’s operating cash flow stack up against its debt?
8187 has built up its total debt levels in the last twelve months, from HK$28.3M to HK$38.3M – this includes both the current and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at HK$49.2M , ready to deploy into the business. Though 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. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can assess some of 8187’s operating efficiency ratios such as ROA here.
Does 8187’s liquid assets cover its short-term commitments?
Looking at 8187’s most recent HK$62.1M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of HK$113.6M, with a current ratio of 1.83x. For luxury 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.
Is 8187’s level of debt at an acceptable level?
With debt reaching 59.48% of equity, 8187 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. Though, since 8187 is currently unprofitable, sustainability of its current state of operations becomes a concern. 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? 8187’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that its financial position may change. I suggest keeping on top of market expectations for 8187’s future growth on our free analysis platform.