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While small-cap stocks, such as B & S International Holdings Ltd. (HKG:1705) with its market cap of HK$368m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Consumer Retailing businesses operating in the environment facing headwinds from current disruption, even ones that are profitable, tend to be high risk. So, understanding the company’s financial health becomes essential. I believe these basic checks tell most of the story you need to know. Nevertheless, this commentary is still very high-level, so I suggest you dig deeper yourself into 1705 here.
How does 1705’s operating cash flow stack up against its debt?
1705’s debt levels have fallen from HK$97m to HK$73m over the last 12 months made up of predominantly near term debt. With this reduction in debt, 1705’s cash and short-term investments stands at HK$62m , ready to deploy into the business. On top of this, 1705 has generated cash from operations of HK$36m over the same time period, resulting in an operating cash to total debt ratio of 50%, indicating that 1705’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 1705’s case, it is able to generate 0.5x cash from its debt capital.
Does 1705’s liquid assets cover its short-term commitments?
Looking at 1705’s HK$110m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of HK$214m, leading to a 1.95x current account ratio. Generally, for Consumer Retailing companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Does 1705 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 50%, 1705 can be considered as an above-average leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can check to see whether 1705 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 1705’s, case, the ratio of 15.18x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
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1705’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 1705 has company-specific issues impacting its capital structure decisions. I recommend you continue to research B & S International Holdings to get a more holistic view of the small-cap by looking at: