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M&L Holdings Group Limited (SEHK:8152) is a small-cap stock with a market capitalization of HK$174.00M. 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? Since 8152 is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into 8152 here.
Does 8152 generate an acceptable amount of cash through operations?
Over the past year, 8152 has reduced its debt from HK$37.60M to HK$22.31M – this includes both the current and long-term debt. With this reduction in debt, 8152 currently has HK$44.36M remaining in cash and short-term investments for investing into the business. On top of this, 8152 has generated cash from operations of HK$26.46M during the same period of time, resulting in an operating cash to total debt ratio of 118.59%, signalling that 8152’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires a positive net income. In 8152’s case, it is able to generate 1.19x cash from its debt capital.
Can 8152 meet its short-term obligations with the cash in hand?
At the current liabilities level of HK$83.78M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.92x. For Trade Distributors companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is 8152’s debt level acceptable?
8152’s level of debt is appropriate relative to its total equity, at 26.77%. This range is considered safe as 8152 is not taking on too much debt obligation, which may be constraining for future growth. Investors’ risk associated with debt is very low with 8152, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
8152’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure 8152 has company-specific issues impacting its capital structure decisions. I recommend you continue to research M&L Holdings Group to get a better picture of the stock by looking at: