Investors are always looking for growth in small-cap stocks like Neway Group Holdings Limited (SEHK:55), with a market cap of HK$124.28M. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into 55 here.
Does 55 generate an acceptable amount of cash through operations?
Over the past year, 55 has ramped up its debt from HK$30.0M to HK$73.7M , which comprises of short- and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at HK$379.4M , ready to deploy into the business. On top of this, 55 has produced HK$57.7M in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 78.27%, signalling that 55’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 55’s case, it is able to generate 0.78x cash from its debt capital.
Can 55 meet its short-term obligations with the cash in hand?
At the current liabilities level of HK$190.0M liabilities, it appears that the company has been able to meet these commitments with a current assets level of HK$698.0M, leading to a 3.67x current account ratio. However, anything above 3x is considered high and could mean that 55 has too much idle capital in low-earning investments.
Can 55 service its debt comfortably?
With debt at 7.26% of equity, 55 may be thought of as having low leverage. This range is considered safe as 55 is not taking on too much debt obligation, which may be constraining for future growth. We can test if 55’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 55, the ratio of 10.29x suggests that interest is excessively covered, which means that debtors may be willing to loan the company more money, giving 55 ample headroom to grow its debt facilities.
Next Steps:
Are you a shareholder? 55 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. Furthermore, the company exhibits an ability to meet its near term obligations should an adverse event occur. Moving forward, 55’s financial situation may change. You should always be researching market expectations for 55’s future growth on our free analysis platform.