While small-cap stocks, such as Global Strategic Group Limited (SEHK:8007) with its market cap of HK$848.25M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that 8007 is not presently profitable, it’s crucial to understand the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 8007 here.
Does 8007 generate enough cash through operations?
In the previous 12 months, 8007’s rose by about HK$169.1M made up of current and long term debt. With this growth in debt, 8007 currently has HK$15.0M remaining in cash and short-term investments , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can assess some of 8007’s operating efficiency ratios such as ROA here.
Does 8007’s liquid assets cover its short-term commitments?
With current liabilities at HK$53.8M, the company has not been able to meet these commitments with a current assets level of HK$25.7M, leading to a 0.48x current account ratio. which is under the appropriate industry ratio of 3x.
Can 8007 service its debt comfortably?
With a debt-to-equity ratio of 96.79%, 8007 can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since 8007 is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
8007’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, the company may not be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure 8007 has company-specific issues impacting its capital structure decisions. You should continue to research Global Strategic Group to get a more holistic view of the stock by looking at: