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Investors are always looking for growth in small-cap stocks like Multifield International Holdings Limited (HKG:898), with a market cap of HK$1.6b. However, an important fact which most ignore is: how financially healthy is the business? Evaluating financial health as part of your investment thesis 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. However, I know these factors are very high-level, so I suggest you dig deeper yourself into 898 here.
How does 898’s operating cash flow stack up against its debt?
898 has sustained its debt level by about HK$1.9b over the last 12 months – this includes both the current and long-term debt. At this constant level of debt, the current cash and short-term investment levels stands at HK$1.7b for investing into the business. Moreover, 898 has generated cash from operations of HK$303m in the last twelve months, resulting in an operating cash to total debt ratio of 16%, meaning that 898’s debt is not appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 898’s case, it is able to generate 0.16x cash from its debt capital.
Can 898 meet its short-term obligations with the cash in hand?
With current liabilities at HK$2.2b, the company has been able to meet these obligations given the level of current assets of HK$2.2b, with a current ratio of 1.02x. 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 898’s debt level acceptable?
With debt at 24% of equity, 898 may be thought of as appropriately levered. 898 is not taking on too much debt commitment, which may be constraining for future growth. We can check to see whether 898 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 898’s, case, the ratio of 7.7x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
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Although 898’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 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 898’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Multifield International Holdings to get a more holistic view of the stock by looking at: