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While small-cap stocks, such as Mobicon Group Limited (SEHK:1213) with its market cap of HK$290.00M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Electronic industry, in particular ones that run negative earnings, are inclined towards being higher risk. So, understanding the company’s financial health becomes crucial. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into 1213 here.
Does 1213 generate enough cash through operations?
Over the past year, 1213 has reduced its debt from HK$100.83M to HK$80.27M made up of predominantly near term debt. With this debt payback, the current cash and short-term investment levels stands at HK$45.74M , ready to deploy into the business. On top of this, 1213 has generated HK$36.03M in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 44.88%, indicating that 1213’s current level of operating cash is high enough to cover debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In 1213’s case, it is able to generate 0.45x cash from its debt capital.
Does 1213’s liquid assets cover its short-term commitments?
With current liabilities at HK$135.86M, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.16x. Generally, for Electronic companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is 1213’s debt level acceptable?
1213 is a relatively highly levered company with a debt-to-equity of 52.93%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since 1213 is currently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
1213’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. Since there is also no concerns around 1213’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 1213 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Mobicon Group to get a more holistic view of the small-cap by looking at: