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Great Water Holdings Limited (HKG:8196) is a small-cap stock with a market capitalization of HK$645.0m. 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? Assessing first and foremost the financial health is crucial, since poor capital management may bring about 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, this commentary is still very high-level, so I recommend you dig deeper yourself into 8196 here.
How does 8196’s operating cash flow stack up against its debt?
8196 has built up its total debt levels in the last twelve months, from CN¥40.0m to CN¥58.9m – this includes both the current and long-term debt. With this rise in debt, the current cash and short-term investment levels stands at CN¥74.1m , ready to deploy 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 8196’s operating efficiency ratios such as ROA here.
Can 8196 pay its short-term liabilities?
Looking at 8196’s most recent CN¥208.8m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of CN¥379.1m, with a current ratio of 1.82x. For Trade Distributors 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 8196’s debt level acceptable?
With debt at 25.5% of equity, 8196 may be thought of as appropriately levered. 8196 is not taking on too much debt commitment, which may be constraining for future growth. We can test if 8196’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 8196, the ratio of 11.81x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as 8196’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although 8196’s debt level is relatively low, its cash flow levels still could not copiously cover its borrowings. This may indicate room for improvement in terms of its operating efficiency. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I’m sure 8196 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Great Water Holdings to get a more holistic view of the stock by looking at: