Investors are always looking for growth in small-cap stocks like S Culture International Holdings Limited (SEHK:1255), with a market cap of HK$648.00M. However, an important fact which most ignore is: how financially healthy is the business? Specialty Retail businesses operating in the environment facing headwinds from current disruption, in particular ones that run negative earnings, tend to be high risk. Evaluating financial health as part of your investment thesis is vital. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I recommend you dig deeper yourself into 1255 here.
Does 1255 generate enough cash through operations?
1255’s debt level has been constant at around HK$205.1M over the previous year made up of current and long term debt. At this current level of debt, the current cash and short-term investment levels stands at HK$26.2M for investing into the business. Additionally, 1255 has generated HK$9.5M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 4.62%, meaning that 1255’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for loss making companies since metrics such as return on asset (ROA) requires positive earnings. In 1255’s case, it is able to generate 0.05x cash from its debt capital.
Can 1255 pay its short-term liabilities?
Looking at 1255’s most recent HK$220.5M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of HK$343.2M, with a current ratio of 1.56x. For specialty retail companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does 1255 face the risk of succumbing to its debt-load?
With total debt exceeding equities, 1255 is considered a highly levered company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since 1255 is presently loss-making, 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:
Are you a shareholder? At its current level of cash flow coverage, 1255 has room for improvement to better cushion for events which may require debt repayment. Though, its high liquidity means the company should continue to operate smoothly in the case of adverse events. Given that 1255’s financial situation may change. You should always be keeping on top of market expectations for 1255’s future growth on our free analysis platform.