While small-cap stocks, such as Silver Base Group Holdings Limited (HKG:886) with its market cap of HK$1.25b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Given that 886 is not presently profitable, it’s essential 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. However, since I only look at basic financial figures, I’d encourage you to dig deeper yourself into 886 here.
Does 886 produce enough cash relative to debt?
886’s debt levels surged from HK$521.1m to HK$706.8m over the last 12 months – this includes both the current and long-term debt. With this increase in debt, 886 currently has HK$418.9m remaining in cash and short-term investments for investing into the business. Moreover, 886 has produced cash from operations of HK$321.5m in the last twelve months, leading to an operating cash to total debt ratio of 45.5%, indicating that 886’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency for unprofitable businesses as traditional metrics such as return on asset (ROA) requires positive earnings. In 886’s case, it is able to generate 0.45x cash from its debt capital.
Can 886 meet its short-term obligations with the cash in hand?
Looking at 886’s most recent HK$1.08b liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.2x. For Retail Distributors companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Can 886 service its debt comfortably?
886 is a relatively highly levered company with a debt-to-equity of 90.1%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since 886 is presently unprofitable, 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:
886’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. I admit this is a fairly basic analysis for 886’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Silver Base Group Holdings to get a more holistic view of the small-cap by looking at: