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While small-cap stocks, such as Wan Kei Group Holdings Limited (HKG:1718) with its market cap of HK$701m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Since 1718 is loss-making right now, it’s vital to assess the current state of its operations and pathway to profitability. I believe these basic checks tell most of the story you need to know. Though, I know these factors are very high-level, so I’d encourage you to dig deeper yourself into 1718 here.
How does 1718’s operating cash flow stack up against its debt?
1718’s debt levels surged from HK$124m to HK$161m over the last 12 months . With this growth in debt, 1718’s cash and short-term investments stands at HK$425m , ready to deploy into the business. Moving onto cash from operations, its small level of operating cash flow means calculating cash-to-debt wouldn’t be too useful, though these low levels of cash means that operational efficiency is worth a look. For this article’s sake, I won’t be looking at this today, but you can take a look at some of 1718’s operating efficiency ratios such as ROA here.
Can 1718 pay its short-term liabilities?
At the current liabilities level of HK$211m liabilities, the company has been able to meet these commitments with a current assets level of HK$512m, leading to a 2.43x current account ratio. Generally, for Construction companies, this is a reasonable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Does 1718 face the risk of succumbing to its debt-load?
1718 is a relatively highly levered company with a debt-to-equity of 49%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since 1718 is currently unprofitable, 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:
At its current level of cash flow coverage, 1718 has room for improvement to better cushion for events which may require debt repayment. However, the company will be able to pay all of its upcoming liabilities from its current short-term assets. Keep in mind I haven’t considered other factors such as how 1718 has been performing in the past. You should continue to research Wan Kei Group Holdings to get a better picture of the stock by looking at: