Eco-Tek Holdings Limited (SEHK:8169) is a small-cap stock with a market capitalization of HK$122.11M. 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? Since 8169 is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I suggest you dig deeper yourself into 8169 here.
Does 8169 generate enough cash through operations?
Over the past year, 8169 has maintained its debt levels at around HK$19.0M comprising of short- and long-term debt. At this current level of debt, the current cash and short-term investment levels stands at HK$20.6M , ready to deploy into the business. On top of this, 8169 has generated cash from operations of HK$6.4M over the same time period, resulting in an operating cash to total debt ratio of 0.34x, meaning that 8169’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies since metrics such as return on asset (ROA) requires a positive net income. In 8169’s case, it is able to generate 0.34x cash from its debt capital.
Can 8169 pay its short-term liabilities?
At the current liabilities level of HK$34.6M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.61x. Generally, for commercial services companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is 8169’s level of debt at an acceptable level?
With debt at 19.55% of equity, 8169 may be thought of as appropriately levered. 8169 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. 8169’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
Next Steps:
Are you a shareholder? 8169’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that 8169’s financial situation may change. I recommend keeping on top of market expectations for 8169’s future growth on our free analysis platform.