While small-cap stocks, such as Munsun Capital Group Limited (HKG:1194) with its market cap of HK$887m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since 1194 is loss-making right now, it’s crucial to evaluate the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. However, I know these factors are very high-level, so I recommend you dig deeper yourself into 1194 here.
Does 1194 produce enough cash relative to debt?
1194 has shrunken its total debt levels in the last twelve months, from HK$5.5b to HK$4.8b – this includes long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at HK$102m , ready to deploy into the business. Additionally, 1194 has generated cash from operations of HK$175m during the same period of time, leading to an operating cash to total debt ratio of 3.7%, meaning that 1194’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable companies as traditional metrics such as return on asset (ROA) requires a positive net income. In 1194’s case, it is able to generate 0.037x cash from its debt capital.
Can 1194 pay its short-term liabilities?
With current liabilities at HK$4.3b, it seems that the business may not be able to easily meet these obligations given the level of current assets of HK$912m, with a current ratio of 0.21x.
Does 1194 face the risk of succumbing to its debt-load?
1194 is a relatively highly levered company with a debt-to-equity of 67%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. Though, since 1194 is currently loss-making, there’s a question of sustainability of its current operations. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
1194’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. Though its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for 1194’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Munsun Capital Group to get a more holistic view of the stock by looking at: