While small-cap stocks, such as Pioneer Global Group Limited (SEHK:224) with its market cap of HK$2.20B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. 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 recommend you dig deeper yourself into 224 here.
Does 224 generate an acceptable amount of cash through operations?
Over the past year, 224 has ramped up its debt from HK$2,066.4M to HK$2,278.3M , which is made up of current and long term debt. With this rise in debt, the current cash and short-term investment levels stands at HK$472.5M for investing into the business. Moreover, 224 has produced HK$179.1M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 0.08x, indicating that 224’s operating cash is not sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 224’s case, it is able to generate 0.08x cash from its debt capital.
Does 224’s liquid assets cover its short-term commitments?
Looking at 224’s most recent HK$900.8M liabilities, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.56x, which is below the prudent industry ratio of 3x.
Is 224’s level of debt at an acceptable level?
With debt at 31.97% of equity, 224 may be thought of as appropriately levered. This range is considered safe as 224 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether 224 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 224’s, case, the ratio of 6.17x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 224 ample headroom to grow its debt facilities.
Next Steps:
Are you a shareholder? Although 224’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Given that 224’s financial situation may change. I recommend keeping abreast of market expectations for 224’s future growth on our free analysis platform.