MicroPort Scientific Corporation (SEHK:853) is a small-cap stock with a market capitalization of HK$11.24B. 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? Companies operating in the medical equipment industry, even ones that are profitable, are inclined towards being higher risk. So, understanding the company’s financial health becomes vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 853 here.
Does 853 generate enough cash through operations?
853 has built up its total debt levels in the last twelve months, from $280.5M to $296.4M , which is made up of current and long term debt. With this rise in debt, 853 currently has $135.2M remaining in cash and short-term investments , ready to deploy into the business. On top of this, 853 has generated $82.5M in operating cash flow over the same time period, resulting in an operating cash to total debt ratio of 27.84%, indicating that 853’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 853’s case, it is able to generate 0.28x cash from its debt capital.
Does 853’s liquid assets cover its short-term commitments?
With current liabilities at $210.0M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.7x. For medical equipment companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Can 853 service its debt comfortably?
With a debt-to-equity ratio of 60.17%, 853 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. We can check to see whether 853 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interets and tax (EBIT) at least three times its net interest payments is considered financially sound. In 853’s, case, the ratio of 4.23x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.