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Hopefluent Group Holdings Limited (HKG:733) is a small-cap stock with a market capitalization of HK$1.5b. 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? So, understanding the company’s financial health becomes 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. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into 733 here.
Does 733 produce enough cash relative to debt?
733 has built up its total debt levels in the last twelve months, from HK$392m to HK$796m , which includes long-term debt. With this growth in debt, 733’s cash and short-term investments stands at HK$1.0b for investing into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, 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 take a look at some of 733’s operating efficiency ratios such as ROA here.
Can 733 pay its short-term liabilities?
Looking at 733’s HK$1.2b in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3x. For Real Estate companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is 733’s debt level acceptable?
733’s level of debt is appropriate relative to its total equity, at 27%. 733 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether 733 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 733’s, case, the ratio of 19.89x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as 733’s high interest coverage is seen as responsible and safe practice.
Next Steps:
733’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for 733’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Hopefluent Group Holdings to get a better picture of the stock by looking at: