Investors are always looking for growth in small-cap stocks like Imperium Group Global Holdings Limited (SEHK:776), with a market cap of HK$1.41B. However, an important fact which most ignore is: how financially healthy is the business? Consumer Durables businesses operating in the environment facing headwinds from current disruption, in particular ones that run negative earnings, are inclined towards being higher risk. Assessing first and foremost the financial health is crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into 776 here.
Does 776 generate an acceptable amount of cash through operations?
776 has shrunken its total debt levels in the last twelve months, from HK$40.2M to HK$34.5M . With this reduction in debt, 776 currently has HK$102.0M remaining in cash and short-term investments for investing into the business. Though its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can take a look at some of 776’s operating efficiency ratios such as ROA here.
Can 776 meet its short-term obligations with the cash in hand?
With current liabilities at HK$68.3M liabilities, the company has been able to meet these commitments with a current assets level of HK$171.1M, leading to a 2.5x current account ratio. Usually, for consumer durables companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is 776’s level of debt at an acceptable level?
776’s level of debt is appropriate relative to its total equity, at 28.65%. This range is considered safe as 776 is not taking on too much debt obligation, which may be constraining for future growth. 776’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? 776’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that its financial position may change. I suggest keeping abreast of market expectations for 776’s future growth on our free analysis platform.