While small-cap stocks, such as Eminence Enterprise Limited (HKG:616) with its market cap of HK$216.51m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes vital, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into 616 here.
How does 616’s operating cash flow stack up against its debt?
616 has built up its total debt levels in the last twelve months, from HK$875.50m to HK$1.16b – this includes both the current and long-term debt. With this increase in debt, 616’s cash and short-term investments stands at HK$128.86m for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, 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 616’s operating efficiency ratios such as ROA here.
Can 616 meet its short-term obligations with the cash in hand?
With current liabilities at HK$589.31m, it appears that the company has been able to meet these commitments with a current assets level of HK$2.03b, leading to a 3.45x current account ratio. Though, anything about 3x may be excessive, since 616 may be leaving too much capital in low-earning investments.
Does 616 face the risk of succumbing to its debt-load?
With debt reaching 42.81% of equity, 616 may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if 616’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 616, the ratio of 0.46x suggests that interest is not strongly covered, which means that lenders may be more reluctant to lend out more funding as 616’s low interest coverage already puts the company at higher risk of default.
Next Steps:
At its current level of cash flow coverage, 616 has room for improvement to better cushion for events which may require debt repayment. However, the company exhibits proper management of current assets and upcoming liabilities. I admit this is a fairly basic analysis for 616’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Eminence Enterprise to get a more holistic view of the stock by looking at: