In This Article:
While small-cap stocks, such as Sanroc International Holdings Limited (SEHK:1660) with its market cap of HK$8.62B, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Assessing first and foremost the financial health is crucial, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, this commentary is still very high-level, so I recommend you dig deeper yourself into 1660 here.
Does 1660 generate an acceptable amount of cash through operations?
Over the past year, 1660 has ramped up its debt from HK$57.01M to HK$62.53M made up of predominantly near term debt. With this rise in debt, 1660’s cash and short-term investments stands at HK$137.73M , ready to deploy into the business. On top of this, 1660 has produced HK$35.80M in operating cash flow in the last twelve months, leading to an operating cash to total debt ratio of 57.25%, indicating that 1660’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 1660’s case, it is able to generate 0.57x cash from its debt capital.
Can 1660 meet its short-term obligations with the cash in hand?
Looking at 1660’s most recent HK$92.77M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.24x. Usually, for Trade Distributors companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Is 1660’s debt level acceptable?
With a debt-to-equity ratio of 25.05%, 1660’s debt level may be seen as prudent. 1660 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if 1660’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 1660, the ratio of 30.84x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving 1660 ample headroom to grow its debt facilities.
Next Steps:
1660 has demonstrated its ability to generate sufficient levels of cash flow, while its debt hovers at an appropriate level. Furthermore, the company will be able to pay all of its upcoming liabilities from its current short-term assets. This is only a rough assessment of financial health, and I’m sure 1660 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Sanroc International Holdings to get a more holistic view of the stock by looking at: