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While small-cap stocks, such as Ever Harvest Group Holdings Limited (HKG:1549) with its market cap of HK$164m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that 1549 is not presently profitable, it’s essential to assess the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I suggest you dig deeper yourself into 1549 here.
How much cash does 1549 generate through its operations?
1549 has built up its total debt levels in the last twelve months, from HK$22m to HK$35m , which is mainly comprised of near term debt. With this rise in debt, 1549 currently has HK$95m remaining in cash and short-term investments , ready to deploy into the business. Moreover, 1549 has generated cash from operations of HK$12m over the same time period, resulting in an operating cash to total debt ratio of 34%, indicating that 1549’s current level of operating cash is high enough to cover debt. This ratio can also be a sign of operational efficiency for unprofitable companies since metrics such as return on asset (ROA) requires a positive net income. In 1549’s case, it is able to generate 0.34x cash from its debt capital.
Does 1549’s liquid assets cover its short-term commitments?
At the current liabilities level of HK$123m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of HK$147m, with a current ratio of 1.2x. Usually, for Shipping companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does 1549 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 31%, 1549’s debt level may be seen as prudent. This range is considered safe as 1549 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. 1549’s risk around capital structure is low, and the company has the headroom and ability to raise debt should it need to in the future.
Next Steps:
1549 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. In addition to this, the company exhibits an ability to meet its near term obligations should an adverse event occur. Keep in mind I haven’t considered other factors such as how 1549 has been performing in the past. You should continue to research Ever Harvest Group Holdings to get a better picture of the stock by looking at: