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Investors are always looking for growth in small-cap stocks like King Fook Holdings Limited (HKG:280), with a market cap of HK$270m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Specialty Retail industry facing headwinds from current disruption, especially ones that are currently loss-making, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is essential. I believe these basic checks tell most of the story you need to know. However, given that I have not delve into the company-specifics, I’d encourage you to dig deeper yourself into 280 here.

How much cash does 280 generate through its operations?

280’s debt levels have fallen from HK$96m to HK$88m over the last 12 months made up of predominantly near term debt. With this reduction in debt, 280’s cash and short-term investments stands at HK$224m for investing into the business. Moreover, 280 has generated cash from operations of HK$107m over the same time period, resulting in an operating cash to total debt ratio of 122%, signalling that 280’s operating cash is sufficient to cover its debt. This ratio can also be a sign of operational efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In 280’s case, it is able to generate 1.22x cash from its debt capital.

Can 280 meet its short-term obligations with the cash in hand?

With current liabilities at HK$116m, it appears that the company has been able to meet these obligations given the level of current assets of HK$743m, with a current ratio of 6.38x. Having said that, many consider anything above 3x to be quite high.

Is 280’s debt level acceptable?

With debt at 14% of equity, 280 may be thought of as appropriately levered. 280 is not taking on too much debt commitment, which may be constraining for future growth. Risk around debt is very low for 280, and the company also has the ability and headroom to increase debt if needed going forward.

Next Steps:

280’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how 280 has been performing in the past. I recommend you continue to research King Fook Holdings to get a better picture of the stock by looking at:

1. Valuation: What is 280 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether 280 is currently mispriced by the market.

2. Historical Performance: What has 280’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.