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While small-cap stocks, such as International Standard Resources Holdings Limited (SEHK:91) with its market cap of HK$167.69M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Semiconductor companies, especially ones that are currently loss-making, are inclined towards being higher risk. Assessing first and foremost the financial health is vital. Here are few basic financial health checks you should consider before taking the plunge. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into 91 here.
Does 91 generate enough cash through operations?
91 has shrunken its total debt levels in the last twelve months, from HK$565.43M to HK$416.34M – this includes both the current and long-term debt. With this debt repayment, the current cash and short-term investment levels stands at HK$65.67M for investing into the business. Moreover, 91 has produced HK$8.06M in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 1.93%, meaning that 91’s current level of operating cash is not high enough to cover debt. This ratio can also be a sign of operational efficiency for loss making companies as traditional metrics such as return on asset (ROA) requires a positive net income. In 91’s case, it is able to generate 0.019x cash from its debt capital.
Can 91 pay its short-term liabilities?
With current liabilities at HK$426.59M, the company is not able to meet these obligations given the level of current assets of HK$77.80M, with a current ratio of 0.18x below the prudent level of 3x.
Does 91 face the risk of succumbing to its debt-load?
91 is a relatively highly levered company with a debt-to-equity of 69.13%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since 91 is presently 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:
91’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how 91 has been performing in the past. I recommend you continue to research International Standard Resources Holdings to get a better picture of the stock by looking at: