Cool Link (Holdings) Limited (SEHK:8491) is a small-cap stock with a market capitalization of HK$174.00M. 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? Consumer Retailing businesses operating in the environment facing headwinds from current disruption, especially ones that are currently loss-making, are inclined towards being higher risk. So, understanding the company’s financial health becomes crucial. 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 suggest you dig deeper yourself into 8491 here.
Does 8491 generate an acceptable amount of cash through operations?
8491 has built up its total debt levels in the last twelve months, from S$4.55M to S$5.01M , which is made up of current and long term debt. With this rise in debt, 8491’s cash and short-term investments stands at S$3.82M , ready to deploy into the business. On top of this, 8491 has generated cash from operations of S$1.28M during the same period of time, resulting in an operating cash to total debt ratio of 25.46%, signalling that 8491’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires a positive net income. In 8491’s case, it is able to generate 0.25x cash from its debt capital.
Can 8491 meet its short-term obligations with the cash in hand?
With current liabilities at S$7.45M, it appears that the company has been able to meet these commitments with a current assets level of S$13.20M, leading to a 1.77x current account ratio. Usually, for Consumer Retailing companies, this is a suitable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is 8491’s debt level acceptable?
With a debt-to-equity ratio of 47.49%, 8491 can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since 8491 is currently 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:
8491’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how 8491 has been performing in the past. You should continue to research Cool Link (Holdings) to get a better picture of the small-cap by looking at: