Water Oasis Group Limited (SEHK:1161) is a small-cap stock with a market capitalization of HK$742.49M. 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? Assessing first and foremost the financial health is vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into 1161 here.
Does 1161 generate enough cash through operations?
1161 has shrunken its total debt levels in the last twelve months, from HK$22.6M to HK$19.5M , which comprises of short- and long-term debt. With this debt repayment, 1161 currently has HK$402.4M remaining in cash and short-term investments , ready to deploy into the business. However, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of 1161’s operating efficiency ratios such as ROA here.
Can 1161 meet its short-term obligations with the cash in hand?
With current liabilities at HK$556.2M liabilities, the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.98x, which is below the prudent industry ratio of 3x.
Does 1161 face the risk of succumbing to its debt-load?
1161’s level of debt is low relative to its total equity, at 6.24%. This range is considered safe as 1161 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether 1161 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 1161’s, case, the ratio of 637.75x suggests that interest is excessively covered, which means that lenders may be less hesitant to lend out more funding as 1161’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Are you a shareholder? 1161’s high cash coverage and conservative debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. But, as shareholders, you should try and determine whether this level of debt is justified for 1161, especially if meeting short-term obligations could also bring about issues. I recommend taking a look at 1161’s future growth analysis on our free platform. to properly assess the company’s position in further detail.