Tempus Holdings Limited (HKG:6880) is a small-cap stock with a market capitalization of HK$297m. 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? So, understanding the company’s financial health becomes 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. However, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into 6880 here.

How much cash does 6880 generate through its operations?

6880’s debt levels surged from HK$320m to HK$565m over the last 12 months , which includes long-term debt. With this rise in debt, 6880 currently has HK$195m remaining in cash and short-term investments for investing into the business. Moving onto cash from operations, its operating cash flow is not yet significant enough to calculate a meaningful cash-to-debt ratio, indicating that operational efficiency is something we’d need to take a look at. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can examine some of 6880’s operating efficiency ratios such as ROA here.

Does 6880’s liquid assets cover its short-term commitments?

At the current liabilities level of HK$557m, it appears that the company has been able to meet these commitments with a current assets level of HK$582m, leading to a 1.04x current account ratio. Generally, for Retail Distributors companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

Can 6880 service its debt comfortably?

6880 is a highly-leveraged company with debt exceeding equity by over 100%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible.

Next Steps:

Although 6880’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven’t considered other factors such as how 6880 has been performing in the past. I suggest you continue to research Tempus Holdings to get a better picture of the small-cap by looking at: