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While small-cap stocks, such as Grand Ming Group Holdings Limited (HKG:1271) with its market cap of HK$3.5b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Though, since I only look at basic financial figures, I suggest you dig deeper yourself into 1271 here.
How does 1271’s operating cash flow stack up against its debt?
Over the past year, 1271 has ramped up its debt from HK$3.1b to HK$3.9b , which includes long-term debt. With this growth in debt, the current cash and short-term investment levels stands at HK$109m 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. 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 1271’s operating efficiency ratios such as ROA here.
Can 1271 pay its short-term liabilities?
Looking at 1271’s HK$553m in current liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 4.51x. However, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
Is 1271’s debt level acceptable?
With total debt exceeding equities, 1271 is considered a highly levered company. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In 1271’s case, the ratio of 10.85x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving 1271 ample headroom to grow its debt facilities.
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Although 1271’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 1271’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 1271 has company-specific issues impacting its capital structure decisions. You should continue to research Grand Ming Group Holdings to get a better picture of the small-cap by looking at: