Imperium Group Global Holdings Limited (SEHK:776) is a small-cap stock with a market capitalization of HK$1.31B. 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 Durables businesses operating in the environment facing headwinds from current disruption, in particular ones that run negative earnings, tend to be high risk. So, understanding the company’s financial health becomes crucial. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I recommend you dig deeper yourself into 776 here.

How does 776’s operating cash flow stack up against its debt?

776 has shrunken its total debt levels in the last twelve months, from HK$40.22M to HK$34.46M . With this debt payback, 776 currently has HK$101.98M remaining in cash and short-term investments for investing 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. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of 776’s operating efficiency ratios such as ROA here.

Can 776 meet its short-term obligations with the cash in hand?

At the current liabilities level of HK$68.32M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of HK$171.09M, with a current ratio of 2.5x. Generally, for Consumer Durables companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Can 776 service its debt comfortably?

With a debt-to-equity ratio of 28.65%, 776’s debt level may be seen as prudent. This range is considered safe as 776 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. 776’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:

776’s low debt is also met with low coverage. This indicates room for improvement as its cash flow covers less than a quarter of its borrowings, which means its operating efficiency could be better. However, 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 776 has been performing in the past. You should continue to research Imperium Group Global Holdings to get a better picture of the stock by looking at the areas below. Just a heads up – to access some parts of the Simply Wall St research tool you might be asked to create a free account, but it takes just one click and the information they provide is definitely worth it in my opinion.