What Does The Sincere Company, Limited's (HKG:244) Balance Sheet Tell Us About It?
The Sincere Company, Limited (HKG:244) is a small-cap stock with a market capitalization of HK$174m. 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 244 is not presently profitable, it’s crucial to evaluate the current state of its operations and pathway to profitability. The following basic checks can help you get a picture of the company's balance sheet strength. Nevertheless, potential investors would need to take a closer look, and I suggest you dig deeper yourself into 244 here.
244’s Debt (And Cash Flows)
244's debt level has been constant at around HK$166m over the previous year which accounts for long term debt. At this constant level of debt, 244's cash and short-term investments stands at HK$153m , ready to be used for running the business. Moving on, operating cash flow was negative over the last twelve months. 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 244’s operating efficiency ratios such as ROA here.
Can 244 meet its short-term obligations with the cash in hand?
Looking at 244’s HK$241m in current liabilities, the company has been able to meet these obligations given the level of current assets of HK$316m, with a current ratio of 1.32x. The current ratio is the number you get when you divide current assets by current liabilities. Usually, for Multiline Retail companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Can 244 service its debt comfortably?
Since total debt levels exceed equity, 244 is a highly leveraged company. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. But since 244 is presently unprofitable, there’s a question of sustainability of its current operations. Running high debt, while not yet making money, can be risky in unexpected downturns as liquidity may dry up, making it hard to operate.
Next Steps:
Although 244’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet obligations which means its debt is being efficiently utilised. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. This is only a rough assessment of financial health, and I'm sure 244 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Sincere Company to get a better picture of the small-cap by looking at:
Historical Performance: What has 244'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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