In This Article:
Milestone Builder Holdings Limited (HKG:1667) is a small-cap stock with a market capitalization of HK$208m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? So, understanding the company’s financial health becomes crucial, as mismanagement of capital can lead to 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, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into 1667 here.
How does 1667’s operating cash flow stack up against its debt?
Over the past year, 1667 has maintained its debt levels at around HK$64m made up of predominantly near term debt. At this current level of debt, the current cash and short-term investment levels stands at HK$33m , ready to deploy into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. For this article’s sake, I won’t be looking at this today, but you can examine some of 1667’s operating efficiency ratios such as ROA here.
Does 1667’s liquid assets cover its short-term commitments?
With current liabilities at HK$166m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.83x. Generally, for Construction companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Does 1667 face the risk of succumbing to its debt-load?
With debt reaching 41% of equity, 1667 may be thought of as relatively highly levered. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. No matter how high the company’s debt, if it can easily cover the interest payments, it’s considered to be efficient with its use of excess leverage. A company generating earnings after interest and tax at least three times its net interest payments is considered financially sound. In 1667’s case, the ratio of 7.91x suggests that interest is appropriately covered, which means that debtors may be willing to loan the company more money, giving 1667 ample headroom to grow its debt facilities.
Next Steps:
1667’s debt and cash flow levels indicate room for improvement. Its cash flow coverage of less than a quarter of debt means that operating efficiency could be an issue. 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 1667’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Milestone Builder Holdings to get a better picture of the stock by looking at: