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Tse Sui Luen Jewellery (International) Limited (HKG:417) is a small-cap stock with a market capitalization of HK$456m. 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 essential, 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 417 here.
How much cash does 417 generate through its operations?
Over the past year, 417 has reduced its debt from HK$1.0b to HK$787m , which also accounts for long term debt. With this debt repayment, the current cash and short-term investment levels stands at HK$268m , ready to deploy into the business. Additionally, 417 has generated cash from operations of HK$137m in the last twelve months, leading to an operating cash to total debt ratio of 17%, meaning that 417’s operating cash is not sufficient to cover its debt. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 417’s case, it is able to generate 0.17x cash from its debt capital.
Can 417 pay its short-term liabilities?
At the current liabilities level of HK$960m, the company has been able to meet these commitments with a current assets level of HK$2.3b, leading to a 2.41x current account ratio. Generally, for Luxury companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is 417’s debt level acceptable?
417 is a relatively highly levered company with a debt-to-equity of 68%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. We can check to see whether 417 is able to meet its debt obligations by looking at the net interest coverage ratio. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. In 417’s, case, the ratio of 3.32x suggests that interest is appropriately covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
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417’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 417’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Tse Sui Luen Jewellery (International) to get a better picture of the small-cap by looking at: