Investors are always looking for growth in small-cap stocks like TUS International Limited (HKG:872), with a market cap of HK$767m. However, an important fact which most ignore is: how financially healthy is the business? Since 872 is loss-making right now, it’s essential to understand 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. Nevertheless, I know these factors are very high-level, so I recommend you dig deeper yourself into 872 here.
Does 872 produce enough cash relative to debt?
872’s debt levels surged from HK$348m to HK$523m over the last 12 months , which accounts for long term debt. With this increase in debt, the current cash and short-term investment levels stands at HK$163m for investing into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can examine some of 872’s operating efficiency ratios such as ROA here.
Can 872 pay its short-term liabilities?
With current liabilities at HK$443m, it appears that the company has been able to meet these commitments with a current assets level of HK$669m, leading to a 1.51x current account ratio. Generally, for Auto Components 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.
Does 872 face the risk of succumbing to its debt-load?
872 is a relatively highly levered company with a debt-to-equity of 87%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since 872 is currently loss-making, sustainability of its current state of operations becomes a concern. 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:
872’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 872’s liquidity needs, this may be its optimal capital structure for the time being. I admit this is a fairly basic analysis for 872’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research TUS International to get a better picture of the small-cap by looking at: