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While small-cap stocks, such as IAG Holdings Limited (SEHK:8513) with its market cap of HK$188.00M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Medical Equipment industry, especially ones that are currently loss-making, are more likely to be higher risk. Assessing first and foremost the financial health is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 8513 here.
Does 8513 generate an acceptable amount of cash through operations?
8513’s debt levels surged from S$3.48M to S$4.15M over the last 12 months , which comprises of short- and long-term debt. With this growth in debt, the current cash and short-term investment levels stands at S$1.77M for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can assess some of 8513’s operating efficiency ratios such as ROA here.
Can 8513 pay its short-term liabilities?
At the current liabilities level of S$7.46M liabilities, it seems that the business has been able to meet these commitments with a current assets level of S$9.15M, leading to a 1.23x current account ratio. For Medical Equipment companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can 8513 service its debt comfortably?
Since total debt levels have outpaced equities, 8513 is a highly leveraged company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since 8513 is presently loss-making, sustainability of its current state of operations becomes a concern. 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:
8513’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. 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 8513 has been performing in the past. I recommend you continue to research IAG Holdings to get a better picture of the stock by looking at: