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AMS Public Transport Holdings Limited (HKG:77) is a small-cap stock with a market capitalization of HK$247m. 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? Given that 77 is not presently profitable, it’s vital to evaluate the current state of its operations and pathway to profitability. We'll look at some basic checks that can form a snapshot the company’s financial strength. However, potential investors would need to take a closer look, and I suggest you dig deeper yourself into 77 here.
Does 77 Produce Much Cash Relative To Its Debt?
Over the past year, 77 has maintained its debt levels at around HK$155m including long-term debt. At this current level of debt, 77 currently has HK$29m remaining in cash and short-term investments , ready to be used for running the business. Additionally, 77 has generated cash from operations of HK$32m during the same period of time, resulting in an operating cash to total debt ratio of 21%, indicating that 77’s debt is appropriately covered by operating cash.
Can 77 meet its short-term obligations with the cash in hand?
Looking at 77’s HK$45m in current liabilities, it appears that the company may not have an easy time meeting these commitments with a current assets level of HK$40m, leading to a current ratio of 0.88x. The current ratio is calculated by dividing current assets by current liabilities.
Does 77 face the risk of succumbing to its debt-load?
Since total debt levels exceed equity, 77 is a highly leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. Though, since 77 is presently loss-making, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Although 77’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. This is only a rough assessment of financial health, and I'm sure 77 has company-specific issues impacting its capital structure decisions. I suggest you continue to research AMS Public Transport Holdings to get a better picture of the stock by looking at: