Investors are always looking for growth in small-cap stocks like Munsun Capital Group Limited (HKG:1194), with a market cap of HK$519m. However, an important fact which most ignore is: how financially healthy is the business? Since 1194 is loss-making right now, it’s vital to assess the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into 1194 here.
Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!
Does 1194 Produce Much Cash Relative To Its Debt?
1194 has shrunk its total debt levels in the last twelve months, from HK$5.0b to HK$3.6b , which includes long-term debt. With this reduction in debt, 1194's cash and short-term investments stands at HK$81m to keep the business going. Additionally, 1194 has produced HK$178m in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 5.0%, meaning that 1194’s debt is not covered by operating cash.
Can 1194 meet its short-term obligations with the cash in hand?
Looking at 1194’s HK$3.4b in current liabilities, it seems that the business may not be able to easily meet these obligations given the level of current assets of HK$658m, with a current ratio of 0.2x. The current ratio is the number you get when you divide current assets by current liabilities.
Is 1194’s debt level acceptable?
With a debt-to-equity ratio of 46%, 1194 can be considered as an above-average leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. Though, since 1194 is presently unprofitable, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
Although 1194’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for 1194's financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Munsun Capital Group to get a more holistic view of the stock by looking at: