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Vico International Holdings Limited (HKG:1621) is a small-cap stock with a market capitalization of HK$201.0m. 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? Oil and Gas companies, even ones that are profitable, are more likely to be 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 recommend you dig deeper yourself into 1621 here.
How much cash does 1621 generate through its operations?
1621’s debt levels have fallen from HK$20.5m to HK$16.6m over the last 12 months . With this debt repayment, the current cash and short-term investment levels stands at HK$95.3m for investing into the business. Moreover, 1621 has produced HK$13.8m in operating cash flow over the same time period, leading to an operating cash to total debt ratio of 83.1%, signalling that 1621’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In 1621’s case, it is able to generate 0.83x cash from its debt capital.
Can 1621 pay its short-term liabilities?
At the current liabilities level of HK$24.7m liabilities, it seems that the business has been able to meet these commitments with a current assets level of HK$157.0m, leading to a 6.37x current account ratio. However, a ratio greater than 3x may be considered as too high, as 1621 could be holding too much capital in a low-return investment environment.
Does 1621 face the risk of succumbing to its debt-load?
With debt at 10.9% of equity, 1621 may be thought of as appropriately levered. This range is considered safe as 1621 is not taking on too much debt obligation, which can be restrictive and risky for equity-holders. We can check to see whether 1621 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 1621’s, case, the ratio of 86.18x suggests that interest is comfortably 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.
Next Steps:
1621’s high cash coverage and low debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. In addition to this, the company exhibits proper management of current assets and upcoming liabilities. Keep in mind I haven’t considered other factors such as how 1621 has been performing in the past. You should continue to research Vico International Holdings to get a better picture of the stock by looking at: