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Investors are always looking for growth in small-cap stocks like The Sincere Company Limited (HKG:244), with a market cap of HK$102m. However, an important fact which most ignore is: how financially healthy is the business? Companies operating in the Multiline Retail industry facing headwinds from current disruption, in particular ones that run negative earnings, tend to be high risk. Assessing first and foremost the financial health is crucial. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, since I only look at basic financial figures, I suggest you dig deeper yourself into 244 here.
How does 244’s operating cash flow stack up against its debt?
244 has shrunken its total debt levels in the last twelve months, from HK$145m to HK$97m , which comprises of short- and long-term debt. With this reduction in debt, 244’s cash and short-term investments stands at HK$112m , 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 244’s operating efficiency ratios such as ROA here.
Does 244’s liquid assets cover its short-term commitments?
At the current liabilities level of HK$198m liabilities, the company has been able to meet these obligations given the level of current assets of HK$350m, with a current ratio of 1.77x. For Multiline Retail companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Is 244’s debt level acceptable?
244 is a relatively highly levered company with a debt-to-equity of 48%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. Though, since 244 is currently 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.
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At its current level of cash flow coverage, 244 has room for improvement to better cushion for events which may require debt repayment. However, 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 244 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Sincere Company to get a better picture of the stock by looking at: