How Financially Strong Is South Shore Holdings Limited (HKG:577)?
South Shore Holdings Limited (HKG:577) is a small-cap stock with a market capitalization of HK$390m. 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? Since 577 is loss-making right now, it’s essential 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. Though, this commentary is still very high-level, so I recommend you dig deeper yourself into 577 here.
Does 577 produce enough cash relative to debt?
577 has built up its total debt levels in the last twelve months, from HK$4.6b to HK$4.9b , which is made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at HK$1.2b 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. For this article’s sake, I won’t be looking at this today, but you can take a look at some of 577’s operating efficiency ratios such as ROA here.
Does 577’s liquid assets cover its short-term commitments?
Looking at 577’s most recent HK$7.8b liabilities, the company may not be able to easily meet these obligations given the level of current assets of HK$4.8b, with a current ratio of 0.61x.
Is 577’s debt level acceptable?
577 is a relatively highly levered company with a debt-to-equity of 90%. This is not uncommon for a small-cap company given that debt tends to be lower-cost and at times, more accessible. But since 577 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:
577’s high debt levels is not met with high cash flow coverage. This leaves room for improvement in terms of debt management and operational efficiency. In addition to this, its low liquidity raises concerns over whether current asset management practices are properly implemented for the small-cap. I admit this is a fairly basic analysis for 577’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research South Shore Holdings to get a better picture of the stock by looking at:
Historical Performance: What has 577’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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
