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Boill Healthcare Holdings Limited (HKG:1246) is a small-cap stock with a market capitalization of HK$508m. 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? Given that 1246 is not presently profitable, it’s crucial to understand the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into 1246 here.
Does 1246 produce enough cash relative to debt?
1246’s debt levels surged from HK$853m to HK$1.2b over the last 12 months – this includes both the current and long-term debt. With this growth in debt, 1246’s cash and short-term investments stands at HK$225m for investing into the business. Moreover, 1246 has produced HK$297m in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 25%, signalling that 1246’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires a positive net income. In 1246’s case, it is able to generate 0.25x cash from its debt capital.
Can 1246 pay its short-term liabilities?
Looking at 1246’s most recent HK$1.1b liabilities, it appears that the company may not have an easy time meeting these commitments with a current assets level of HK$926m, leading to a current ratio of 0.81x.
Can 1246 service its debt comfortably?
1246 is a relatively highly levered company with a debt-to-equity of 78%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since 1246 is presently loss-making, sustainability of its current state of operations becomes a concern. 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:
1246’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. Furthermore, 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 1246’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Boill Healthcare Holdings to get a better picture of the stock by looking at: