In This Article:
While small-cap stocks, such as New Sports Group Limited (HKG:299) with its market cap of HK$1.3b, 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 299 is not presently profitable, it’s crucial to evaluate the current state of its operations and pathway to profitability. Here are few basic financial health checks you should consider before taking the plunge. Though, I know these factors are very high-level, so I suggest you dig deeper yourself into 299 here.
How does 299’s operating cash flow stack up against its debt?
Over the past year, 299 has ramped up its debt from HK$224m to HK$3.4b , which is made up of current and long term debt. With this increase in debt, 299 currently has HK$1.0b remaining in cash and short-term investments , 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. For this article’s sake, I won’t be looking at this today, but you can assess some of 299’s operating efficiency ratios such as ROA here.
Can 299 pay its short-term liabilities?
With current liabilities at HK$5.9b, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.33x. Usually, for Entertainment companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does 299 face the risk of succumbing to its debt-load?
299 is a relatively highly levered company with a debt-to-equity of 87%. This is not unusual for small-caps as debt tends to be a cheaper and faster source of funding for some businesses. However, since 299 is presently loss-making, there’s a question of sustainability of its current operations. 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:
299’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. Though, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how 299 has been performing in the past. I suggest you continue to research New Sports Group to get a better picture of the stock by looking at: