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While small-cap stocks, such as Major Holdings Limited (HKG:1389) with its market cap of HK$211m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Companies operating in the Consumer Retailing industry facing headwinds from current disruption, even ones that are profitable, are more likely to be higher risk. So, understanding the company’s financial health becomes vital. I believe these basic checks tell most of the story you need to know. However, I know these factors are very high-level, so I recommend you dig deeper yourself into 1389 here.
Does 1389 produce enough cash relative to debt?
Over the past year, 1389 has maintained its debt levels at around HK$29m , which is mainly comprised of near term debt. At this stable level of debt, the current cash and short-term investment levels stands at HK$19m , ready to deploy into the business. On top of this, 1389 has produced cash from operations of HK$6m in the last twelve months, resulting in an operating cash to total debt ratio of 21%, meaning that 1389’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In 1389’s case, it is able to generate 0.21x cash from its debt capital.
Does 1389’s liquid assets cover its short-term commitments?
Looking at 1389’s most recent HK$33m liabilities, it appears that the company has been able to meet these commitments with a current assets level of HK$128m, leading to a 3.83x current account ratio. However, anything above 3x may be considered excessive by some investors. They might argue 1389 is leaving too much capital in low-earning investments.
Does 1389 face the risk of succumbing to its debt-load?
With debt at 28% of equity, 1389 may be thought of as appropriately levered. This range is considered safe as 1389 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can test if 1389’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 1389, the ratio of 9.82x suggests that interest is appropriately covered, which means that lenders may be less hesitant to lend out more funding as 1389’s high interest coverage is seen as responsible and safe practice.
Next Steps:
Although 1389’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. Keep in mind I haven’t considered other factors such as how 1389 has been performing in the past. You should continue to research Major Holdings to get a better picture of the stock by looking at: