Want to participate in a short research study? Help shape the future of investing tools and receive a $20 prize!

While small-cap stocks, such as EGL Holdings Company Limited (HKG:6882) with its market cap of HK$362m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 6882 here.

Does 6882 produce enough cash relative to debt?

6882’s debt levels surged from HK$116m to HK$286m over the last 12 months – this includes long-term debt. With this increase in debt, the current cash and short-term investment levels stands at HK$316m , ready to deploy into the business. On top of this, 6882 has produced cash from operations of HK$43m in the last twelve months, leading to an operating cash to total debt ratio of 15%, indicating that 6882’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 6882’s case, it is able to generate 0.15x cash from its debt capital.

Can 6882 pay its short-term liabilities?

At the current liabilities level of HK$405m, it appears that the company has been able to meet these obligations given the level of current assets of HK$502m, with a current ratio of 1.24x. Generally, for Hospitality companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Is 6882’s debt level acceptable?

With debt reaching 83% of equity, 6882 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. We can check to see whether 6882 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 6882’s, case, the ratio of 7.86x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 6882 ample headroom to grow its debt facilities.

Next Steps:

Although 6882’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. Since there is also no concerns around 6882’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 6882 has company-specific issues impacting its capital structure decisions. I recommend you continue to research EGL Holdings to get a more holistic view of the small-cap by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 6882’s future growth? Take a look at our free research report of analyst consensus for 6882’s outlook.

2. Historical Performance: What has 6882’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.