SDM Group Holdings Limited (SEHK:8363) is a small-cap stock with a market capitalization of HK$123.94M. 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 8363 is loss-making right now, it’s crucial to assess the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, this commentary is still very high-level, so I recommend you dig deeper yourself into 8363 here.
Does 8363 generate an acceptable amount of cash through operations?
8363’s debt levels surged from HK$1.8M to HK$2.5M over the last 12 months , which is mainly comprised of near term debt. With this rise in debt, 8363’s cash and short-term investments stands at HK$25.1M , 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. For this article’s sake, I won’t be looking at this today, but you can take a look at some of 8363’s operating efficiency ratios such as ROA here.
Can 8363 pay its short-term liabilities?
Looking at 8363’s most recent HK$46.5M liabilities, it seems that the business has not been able to meet these commitments with a current assets level of HK$45.9M, leading to a 0.99x current account ratio. which is under the appropriate industry ratio of 3x.
Can 8363 service its debt comfortably?
8363’s level of debt is low relative to its total equity, at 4.96%. This range is considered safe as 8363 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. Investors’ risk associated with debt is virtually non-existent with 8363, and the company has plenty of headroom and ability to raise debt should it need to in the future.
Next Steps:
Are you a shareholder? Although 8363’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. However, the company exhibits an ability to meet its near term obligations should an adverse event occur. Given that its financial position may change. I recommend keeping on top of market expectations for 8363’s future growth on our free analysis platform.
Are you a potential investor? SDM Group Holdings currently has financial flexibility to ramp up growth in the future. Furthermore, its high liquidity ensures the company will continue to operate smoothly should unfavourable circumstances arise. To gain more conviction in the stock, you need to also analyse the company’s track record. You should continue your analysis by taking a look at 8363’s past performance analysis on our free platform to figure out 8363’s financial health position.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.