Investors are always looking for growth in small-cap stocks like Cowell e Holdings Inc (SEHK:1415), with a market cap of HK$2.11B. However, an important fact which most ignore is: how financially healthy is the business? Electronic companies, even ones that are profitable, are inclined towards being higher risk. Evaluating financial health as part of your investment thesis is essential. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, since I only look at basic financial figures, I recommend you dig deeper yourself into 1415 here.

Does 1415 generate an acceptable amount of cash through operations?

1415’s debt levels surged from $40.8M to $89.2M over the last 12 months . With this increase in debt, the current cash and short-term investment levels stands at $125.1M for investing into the business. On top of this, 1415 has generated $1.3M in operating cash flow during the same period of time, resulting in an operating cash to total debt ratio of 1.48%, indicating that 1415’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 1415’s case, it is able to generate 0.01x cash from its debt capital.

Can 1415 pay its short-term liabilities?

With current liabilities at $264.5M, it appears that the company has been able to meet these obligations given the level of current assets of $426.5M, with a current ratio of 1.61x. Generally, for Electronic companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Is 1415’s debt level acceptable?

With a debt-to-equity ratio of 3.46%, 1415’s debt level is relatively low. This range is considered safe as 1415 is not taking on too much debt obligation, which may be constraining for future growth. We can test if 1415’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 1415, the ratio of 119.16x suggests that interest is comfortably 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.

Next Steps:

Although 1415’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. Though, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how 1415 has been performing in the past. I recommend you continue to research Cowell e Holdings to get a better picture of the stock by looking at: