While small-cap stocks, such as Mansion International Holdings Limited (SEHK:8456) with its market cap of HK$164.00M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into 8456 here.
Does 8456 generate enough cash through operations?
Over the past year, 8456 has reduced its debt from HK$60.99M to HK$48.02M made up of predominantly near term debt. With this debt payback, 8456’s cash and short-term investments stands at HK$28.96M for investing into the business. Moreover, 8456 has generated cash from operations of HK$12.85M during the same period of time, leading to an operating cash to total debt ratio of 26.77%, indicating that 8456’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 8456’s case, it is able to generate 0.27x cash from its debt capital.
Can 8456 pay its short-term liabilities?
With current liabilities at HK$100.24M, the company has been able to meet these obligations given the level of current assets of HK$124.03M, with a current ratio of 1.24x. For Luxury companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is 8456’s debt level acceptable?
Since total debt levels have outpaced equities, 8456 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. We can check to see whether 8456 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 8456’s, case, the ratio of 6.1x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as 8456’s high interest coverage is seen as responsible and safe practice.
Next Steps:
8456’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around 8456’s liquidity needs, this may be its optimal capital structure for the time being. This is only a rough assessment of financial health, and I’m sure 8456 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Mansion International Holdings to get a better picture of the small-cap by looking at: