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Investors are always looking for growth in small-cap stocks like Eagle Nice (International) Holdings Limited (HKG:2368), with a market cap of HK$1.6b. However, an important fact which most ignore is: how financially healthy is the business? Assessing first and foremost the financial health is essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, I know these factors are very high-level, so I suggest you dig deeper yourself into 2368 here.
How much cash does 2368 generate through its operations?
2368 has built up its total debt levels in the last twelve months, from HK$143m to HK$197m , which is mainly comprised of near term debt. With this growth in debt, the current cash and short-term investment levels stands at HK$245m , ready to deploy into the business. On top of this, 2368 has generated HK$82m in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 42%, indicating that 2368’s debt is appropriately covered by operating cash. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 2368’s case, it is able to generate 0.42x cash from its debt capital.
Can 2368 pay its short-term liabilities?
With current liabilities at HK$470m, the company has been able to meet these commitments with a current assets level of HK$899m, leading to a 1.91x current account ratio. For Luxury companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is 2368’s debt level acceptable?
With a debt-to-equity ratio of 15%, 2368’s debt level may be seen as prudent. This range is considered safe as 2368 is not taking on too much debt obligation, which may be constraining for future growth. We can check to see whether 2368 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 2368’s, case, the ratio of 156x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as 2368’s high interest coverage is seen as responsible and safe practice.
Next Steps:
2368 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at a safe level. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. This is only a rough assessment of financial health, and I’m sure 2368 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Eagle Nice (International) Holdings to get a more holistic view of the stock by looking at: