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While small-cap stocks, such as MS Concept Limited (SEHK:8447) with its market cap of HK$335.00M, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. So, understanding the company’s financial health becomes essential, since poor capital management may bring about bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into 8447 here.
Does 8447 generate an acceptable amount of cash through operations?
Over the past year, 8447 has reduced its debt from HK$30.14M to HK$25.27M , which is mainly comprised of near term debt. With this reduction in debt, the current cash and short-term investment levels stands at HK$5.11M for investing into the business. On top of this, 8447 has generated cash from operations of HK$22.56M over the same time period, resulting in an operating cash to total debt ratio of 89.27%, meaning that 8447’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 8447’s case, it is able to generate 0.89x cash from its debt capital.
Can 8447 pay its short-term liabilities?
At the current liabilities level of HK$38.99M liabilities, it seems that the business is not able to meet these obligations given the level of current assets of HK$28.75M, with a current ratio of 0.74x below the prudent level of 3x.
Can 8447 service its debt comfortably?
8447 is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if 8447’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 8447, the ratio of 19.76x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving 8447 ample headroom to grow its debt facilities.
Next Steps:
Although 8447’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for 8447’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research MS Concept to get a more holistic view of the stock by looking at: