While small-cap stocks, such as Crocodile Garments Limited (HKG:122) with its market cap of HK$730m, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Evaluating financial health as part of your investment thesis is vital, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. I believe these basic checks tell most of the story you need to know. Though, this commentary is still very high-level, so I’d encourage you to dig deeper yourself into 122 here.
How much cash does 122 generate through its operations?
122’s debt levels surged from HK$631m to HK$867m over the last 12 months , which accounts for long term debt. With this rise in debt, 122’s cash and short-term investments stands at HK$379m for investing 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. As the purpose of this article is a high-level overview, I won’t be looking at this today, but you can take a look at some of 122’s operating efficiency ratios such as ROA here.
Can 122 meet its short-term obligations with the cash in hand?
With current liabilities at HK$714m, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.89x.
Does 122 face the risk of succumbing to its debt-load?
With a debt-to-equity ratio of 48%, 122 can be considered as an above-average leveraged company. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible.
122’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. But, its lack of liquidity raises questions over current asset management practices for the small-cap. I admit this is a fairly basic analysis for 122’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Crocodile Garments to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 122’s future growth? Take a look at our free research report of analyst consensus for 122’s outlook.
- Historical Performance: What has 122’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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