Vestate Group Holdings Limited (SEHK:1386) is a small-cap stock with a market capitalization of HK$902.40M. 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? Given that 1386 is not presently profitable, it’s vital to evaluate the current state of its operations and pathway to profitability. Here are a few basic checks that are good enough to have a broad overview of the company’s financial strength. Nevertheless, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into 1386 here.
Does 1386 generate enough cash through operations?
1386’s debt levels surged from HK$45.0M to HK$224.3M over the last 12 months , which is made up of current and long term debt. With this rise in debt, 1386 currently has HK$45.1M remaining in cash and short-term investments , ready to deploy 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 1386’s operating efficiency ratios such as ROA here.
Can 1386 pay its short-term liabilities?
Looking at 1386’s most recent HK$243.9M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.03x. For Luxury 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 1386’s debt level acceptable?
1386 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. However, since 1386 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:
1386’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. However, its high liquidity means the company should continue to operate smoothly in the case of adverse events. I admit this is a fairly basic analysis for 1386’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Vestate Group Holdings to get a more holistic view of the stock by looking at: