Ozner Water International Holding Limited (HKG:2014) is a small-cap stock with a market capitalization of HK$2.9b. 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? Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into 2014 here.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
2014’s Debt (And Cash Flows)
2014's debt levels surged from CN¥1.4b to CN¥2.0b over the last 12 months , which accounts for long term debt. With this growth in debt, 2014 currently has CN¥398m remaining in cash and short-term investments to keep the business going. Additionally, 2014 has generated cash from operations of CN¥318m during the same period of time, resulting in an operating cash to total debt ratio of 16%, indicating that 2014’s operating cash is less than its debt.
Does 2014’s liquid assets cover its short-term commitments?
With current liabilities at CN¥2.2b, it seems that the business has been able to meet these commitments with a current assets level of CN¥2.4b, leading to a 1.05x current account ratio. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Consumer Durables 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.
Does 2014 face the risk of succumbing to its debt-load?
2014 is a relatively highly levered company with a debt-to-equity of 59%. 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 2014's case, the ratio of 2.73x suggests that interest is not strongly covered, which means that lenders may refuse to lend the company more money, as it is seen as too risky in terms of default.