While small-cap stocks, such as K H Group Holdings Limited (SEHK:1557) with its market cap of HK$468.00M, 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 1557 is not presently profitable, it’s essential to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 1557 here.
Does 1557 generate an acceptable amount of cash through operations?
1557 has shrunken its total debt levels in the last twelve months, from HK$74.3M to HK$47.2M made up of predominantly near term debt. With this debt repayment, 1557’s cash and short-term investments stands at HK$19.6M , ready to deploy into the business. Though its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of 1557’s operating efficiency ratios such as ROA here.
Can 1557 meet its short-term obligations with the cash in hand?
With current liabilities at HK$87.4M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.15x. Generally, for construction companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does 1557 face the risk of succumbing to its debt-load?
1557 is a relatively highly levered company with a debt-to-equity of 46.37%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since 1557 is currently unprofitable, sustainability of its current state of operations becomes a concern. 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:
Are you a shareholder? At its current level of cash flow coverage, 1557 has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that its financial position may be different. I recommend keeping abreast of market expectations for 1557’s future growth on our free analysis platform.