In This Article:
Merdeka Financial Services Group Limited (SEHK:8163) is a small-cap stock with a market capitalization of HK$155.05M. 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? Consumer Retailing businesses operating in the environment facing headwinds from current disruption, in particular ones that run negative earnings, are inclined towards being higher risk. Assessing first and foremost the financial health is vital. I believe these basic checks tell most of the story you need to know. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 8163 here.
Does 8163 generate enough cash through operations?
Over the past year, 8163 has maintained its debt levels at around HK$1.95B – this includes both the current and long-term debt. At this constant level of debt, 8163 currently has HK$101.90M remaining in cash and short-term investments , ready to deploy 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 examine some of 8163’s operating efficiency ratios such as ROA here.
Can 8163 meet its short-term obligations with the cash in hand?
Looking at 8163’s most recent HK$1.91B liabilities, it appears that the company has been able to meet these obligations given the level of current assets of HK$1.97B, with a current ratio of 1.03x. Generally, for Consumer Retailing companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is 8163’s debt level acceptable?
8163 is a highly-leveraged company with debt exceeding equity by over 100%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since 8163 is presently unprofitable, 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:
8163’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how 8163 has been performing in the past. You should continue to research Merdeka Financial Services Group to get a better picture of the stock by looking at: