Keen Ocean International Holding Limited (SEHK:8070) is a small-cap stock with a market capitalization of HK$100.00M. 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? Electronic companies, in particular ones that run negative earnings, are inclined towards being higher risk. So, understanding the company’s financial health becomes vital. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, given that I have not delve into the company-specifics, I recommend you dig deeper yourself into 8070 here.
Does 8070 generate an acceptable amount of cash through operations?
Over the past year, 8070 has ramped up its debt from HK$16.79M to HK$28.45M , which is mainly comprised of near term debt. With this rise in debt, 8070’s cash and short-term investments stands at HK$14.90M for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, 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 take a look at some of 8070’s operating efficiency ratios such as ROA here.
Can 8070 meet its short-term obligations with the cash in hand?
With current liabilities at HK$49.40M, it seems that the business has been able to meet these commitments with a current assets level of HK$102.14M, leading to a 2.07x current account ratio. For Electronic 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.
Does 8070 face the risk of succumbing to its debt-load?
With debt reaching 46.57% of equity, 8070 may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since 8070 is currently 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:
At its current level of cash flow coverage, 8070 has room for improvement to better cushion for events which may require debt repayment. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for 8070’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Keen Ocean International Holding to get a better picture of the stock by looking at: