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Karrie International Holdings Limited (HKG:1050) is a small-cap stock with a market capitalization of HK$2.2b. 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? Electronic companies, even ones that are profitable, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into 1050 here.
How much cash does 1050 generate through its operations?
Over the past year, 1050 has maintained its debt levels at around HK$587m which accounts for long term debt. At this constant level of debt, 1050’s cash and short-term investments stands at HK$250m , ready to deploy into the business. Moreover, 1050 has generated HK$316m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 54%, indicating that 1050’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 1050’s case, it is able to generate 0.54x cash from its debt capital.
Can 1050 pay its short-term liabilities?
Looking at 1050’s HK$963m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.7x. Usually, for Electronic companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is 1050’s debt level acceptable?
1050 is a relatively highly levered company with a debt-to-equity of 55%. 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 1050 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 1050’s, case, the ratio of 18.34x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as 1050’s high interest coverage is seen as responsible and safe practice.