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While small-cap stocks, such as MicroPort Scientific Corporation (HKG:853) with its market cap of HK$14.33b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Medical Equipment companies, even ones that are profitable, tend to be high risk. Evaluating financial health as part of your investment thesis is crucial. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, since I only look at basic financial figures, I suggest you dig deeper yourself into 853 here.
How does 853’s operating cash flow stack up against its debt?
Over the past year, 853 has reduced its debt from HK$296.31m to HK$251.48m – this includes both the current and long-term debt. With this debt repayment, 853’s cash and short-term investments stands at HK$171.94m for investing into the business. Moreover, 853 has generated cash from operations of HK$97.19m in the last twelve months, leading to an operating cash to total debt ratio of 38.65%, meaning that 853’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 853’s case, it is able to generate 0.39x cash from its debt capital.
Can 853 pay its short-term liabilities?
With current liabilities at HK$198.89m, it appears that the company has been able to meet these obligations given the level of current assets of HK$429.71m, with a current ratio of 2.16x. For Medical Equipment 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 853’s debt level acceptable?
With debt reaching 57.23% of equity, 853 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. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In 853’s case, the ratio of 4.74x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as 853’s high interest coverage is seen as responsible and safe practice.
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853’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. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I’m sure 853 has company-specific issues impacting its capital structure decisions. I recommend you continue to research MicroPort Scientific to get a more holistic view of the small-cap by looking at: