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While small-cap stocks, such as SiS International Holdings Limited (HKG:529) with its market cap of HK$1.1b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. Nevertheless, potential investors would need to take a closer look, and I recommend you dig deeper yourself into 529 here.
Does 529 Produce Much Cash Relative To Its Debt?
529 has built up its total debt levels in the last twelve months, from HK$2.9b to HK$3.4b – this includes long-term debt. With this rise in debt, 529's cash and short-term investments stands at HK$603m , ready to be used for running the business. Additionally, 529 has produced cash from operations of HK$140m over the same time period, resulting in an operating cash to total debt ratio of 4.1%, meaning that 529’s current level of operating cash is not high enough to cover debt.
Can 529 pay its short-term liabilities?
At the current liabilities level of HK$3.0b, the company may not be able to easily meet these obligations given the level of current assets of HK$2.6b, with a current ratio of 0.87x. The current ratio is calculated by dividing current assets by current liabilities.
Does 529 face the risk of succumbing to its debt-load?
With debt reaching 88% of equity, 529 may be thought of as relatively highly levered. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can check to see whether 529 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 529's, case, the ratio of 4.41x 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.
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529’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven't considered other factors such as how 529 has been performing in the past. I suggest you continue to research SiS International Holdings to get a better picture of the stock by looking at: