In This Article:
Sandmartin International Holdings Limited (SEHK:482) is a small-cap stock with a market capitalization of HK$321.32M. 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? Communications companies, in particular ones that run negative earnings, are more likely to be higher risk. Evaluating financial health as part of your investment thesis is vital. I believe these basic checks tell most of the story you need to know. However, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into 482 here.
Does 482 generate enough cash through operations?
482’s debt levels surged from HK$363.31M to HK$402.76M over the last 12 months , which comprises of short- and long-term debt. With this increase in debt, 482’s cash and short-term investments stands at HK$76.07M , ready to deploy into the business. Moving onto cash from operations, its trivial cash flows from operations make the cash-to-debt ratio less useful to us, 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 assess some of 482’s operating efficiency ratios such as ROA here.
Can 482 pay its short-term liabilities?
With current liabilities at HK$985.95M, it appears that the company has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.8x, which is below the prudent industry ratio of 3x.
Does 482 face the risk of succumbing to its debt-load?
482 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. However, since 482 is currently unprofitable, there’s a question of sustainability of its current operations. 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:
With a high level of debt on its balance sheet, 482 could still be in a financially strong position if its cash flow also stacked up. However, this isn’t the case, and there’s room for 482 to increase its operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. Keep in mind I haven’t considered other factors such as how 482 has been performing in the past. You should continue to research Sandmartin International Holdings to get a more holistic view of the stock by looking at: