While small-cap stocks, such as My Heart Bodibra Group Limited (SEHK:8297) with its market cap of HK$122.40M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into 8297 here.
How does 8297’s operating cash flow stack up against its debt?
Over the past year, 8297 has ramped up its debt from HK$2.6M to HK$4.7M . With this growth in debt, the current cash and short-term investment levels stands at HK$3.4M for investing into the business. Moreover, 8297 has produced cash from operations of HK$14.0M over the same time period, resulting in an operating cash to total debt ratio of 2.99x, meaning that 8297’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 8297’s case, it is able to generate 2.99x cash from its debt capital.
Can 8297 pay its short-term liabilities?
At the current liabilities level of HK$68.2M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of HK$79.7M, with a current ratio of 1.17x. For textiles, apparel and luxury goods 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 8297’s level of debt at an acceptable level?
8297’s level of debt is appropriate relative to its total equity, at 26.43%. 8297 is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether 8297 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interets and tax (EBIT) at least three times its net interest payments is considered financially sound. In 8297’s, case, the ratio of 65.7x suggests that interest is excessively 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.
Next Steps:
Are you a shareholder? 8297 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Going forward, its financial position may be different. I suggest researching market expectations for 8297’s future growth on our free analysis platform.