In This Article:
Investors are always looking for growth in small-cap stocks like Legend Strategy International Holdings Group Company Limited (SEHK:1355), with a market cap of HK$381.11M. However, an important fact which most ignore is: how financially healthy is the business? Given that 1355 is not presently profitable, it’s vital to understand the current state of its operations and pathway to profitability. 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 recommend you dig deeper yourself into 1355 here.
How does 1355’s operating cash flow stack up against its debt?
Over the past year, 1355 has reduced its debt from HK$53.15M to HK$16.94M – this includes both the current and long-term debt. With this reduction in debt, the current cash and short-term investment levels stands at HK$7.88M 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 1355’s operating efficiency ratios such as ROA here.
Does 1355’s liquid assets cover its short-term commitments?
Looking at 1355’s most recent HK$9.03M liabilities, the company has been able to meet these obligations given the level of current assets of HK$10.93M, with a current ratio of 1.21x. For Hospitality companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is 1355’s debt level acceptable?
1355 is a relatively highly levered company with a debt-to-equity of 76.54%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since 1355 is presently unprofitable, sustainability of its current state of operations becomes a concern. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
At its current level of cash flow coverage, 1355 has room for improvement to better cushion for events which may require debt repayment. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure 1355 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Legend Strategy International Holdings Group to get a more holistic view of the stock by looking at: