Silk Road Logistics Holdings Limited (HKG:988) is a small-cap stock with a market capitalization of HK$319m. 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? Given that 988 is not presently profitable, it’s vital to evaluate the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into 988 here.
Does 988 produce enough cash relative to debt?
988’s debt levels have fallen from HK$824m to HK$505m over the last 12 months , which comprises of short- and long-term debt. With this debt payback, 988’s cash and short-term investments stands at HK$30m , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, 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 take a look at some of 988’s operating efficiency ratios such as ROA here.
Does 988’s liquid assets cover its short-term commitments?
Looking at 988’s most recent HK$1.9b liabilities, the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.84x.
Does 988 face the risk of succumbing to its debt-load?
With debt reaching 46% of equity, 988 may be thought of as relatively highly levered. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. But since 988 is presently loss-making, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.
Next Steps:
988’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. Furthermore, its lack of liquidity raises questions over current asset management practices for the small-cap. This is only a rough assessment of financial health, and I’m sure 988 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Silk Road Logistics Holdings to get a more holistic view of the stock by looking at: