In This Article:
Trio Industrial Electronics Group Limited (HKG:1710) is a small-cap stock with a market capitalization of HK$385.0m. 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? Companies operating in the Electronic industry, even ones that are profitable, are inclined towards being higher risk. Assessing first and foremost the financial health is vital. Here are few basic financial health checks you should consider before taking the plunge. Nevertheless, given that I have not delve into the company-specifics, I suggest you dig deeper yourself into 1710 here.
How does 1710’s operating cash flow stack up against its debt?
Over the past year, 1710 has ramped up its debt from HK$46.8m to HK$94.3m . With this increase in debt, 1710 currently has HK$171.7m 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. For this article’s sake, I won’t be looking at this today, but you can examine some of 1710’s operating efficiency ratios such as ROA here.
Can 1710 pay its short-term liabilities?
At the current liabilities level of HK$211.5m liabilities, it seems that the business has been able to meet these commitments with a current assets level of HK$495.7m, leading to a 2.34x current account ratio. For Electronic companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Does 1710 face the risk of succumbing to its debt-load?
1710’s level of debt is appropriate relative to its total equity, at 29.0%. 1710 is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can test if 1710’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For 1710, the ratio of 20.34x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as 1710’s high interest coverage is seen as responsible and safe practice.
Next Steps:
1710’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. I admit this is a fairly basic analysis for 1710’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Trio Industrial Electronics Group to get a better picture of the stock by looking at: