Evershine Group Holdings Limited (SEHK:8022) is a small-cap stock with a market capitalization of HK$1.60B. 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? Given that 8022 is not presently profitable, it’s crucial to assess the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into 8022 here.
How does 8022’s operating cash flow stack up against its debt?
8022 has built up its total debt levels in the last twelve months, from HK$67.7M to HK$187.0M – this includes both the current and long-term debt. With this rise in debt, 8022 currently has HK$12.4M remaining in cash and short-term investments 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 8022’s operating efficiency ratios such as ROA here.
Can 8022 pay its short-term liabilities?
Looking at 8022’s most recent HK$119.9M liabilities, it appears that the company has been able to meet these commitments with a current assets level of HK$137.4M, leading to a 1.15x current account ratio. Usually, for Hospitality companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can 8022 service its debt comfortably?
With total debt exceeding equities, 8022 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. Though, since 8022 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:
At its current level of cash flow coverage, 8022 has room for improvement to better cushion for events which may require debt repayment. However, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. This is only a rough assessment of financial health, and I’m sure 8022 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Evershine Group Holdings to get a better picture of the stock by looking at: